Fairy dust sprinkled from ivory towers

On the basis that the "impact agenda" is important I thought it worth while responding to Paul Krugman, who seems to think I'm a bit of an idiot ("what I assumed was obvious apparently isn’t to everyone").  That might well be true but let me try and justify my statement that

Krugman seems to believe that by sprinkling the fairy dust of incentives over society the emission busting new technologies will emerge.

The "fairy dust" analogy actually comes from the Disney film The Pirate Fairy (released as Tinkerbell and the Pirates in the UK) which I saw as I am blessed with a 3 year old daughter.  After seeing it I tweeted

Tinkerbell and the pirates: how science can lead to irresponsible innovation if scientists are alienated from society

— Tim Johnson (@TCJUK) May 5, 2014

The plot is an inquisitive fairy, Zarina, causes havoc when an experiment goes wrong and leaves the fairy kingdom and her friends.  She returns and steals the fairy dust having fallen in with a bunch of pirates.  When the pirates have harnessed the power of the stolen dust they lock her up.   Zarina is rescued by her friends, the pirates are defeated (it is a prequel to Peter Pan, and there is a baby crocodile) and the fairies "live happily ever after".  Not expecting much I found an allegory for how science goes wrong when disconnected from society.  This is, no doubt, further evidence that I am an idiot. Alternatively it might be evidence that I am committed to the idea of science in the service of society, not its sovereign.

Because he thinks I am a bit ignorant, Krugman assumes I believe new technologies need to emerge to resolve the problem of carbon emissions.  He argues

I was talking about the fact that at any given time we have a choice of already existing technologies. You can drive a conventional SUV, but you could also drive a hybrid, or for that matter a smaller vehicle that, say, emits half as much carbon as the SUV while providing services that are a lot more than half of what the SUV would provide. You can generate electricity using a coal-fired plant, but you can also use a gas-fired plant, a wind turbine, or solar panels.

In a sense, so was I.

I have been involved in published research on modelling incentive structures to trigger investment in the UK's generation capacity to maintain an acceptable level of security of supply.  The UK energy market was de-regulated in the 1990s in the expectation that the privatised industry would deliver lower retail prices.  This it did, but at two costs.  Firstly UK energy prices are volatile, which is a problem for retail consumers who have a preference for "fixed costs".  More important for the UK's energy supply is that the privatised business has taken rents but is not regenerating generation capacity and there is a real concern that the industry will fail to meet future demand, from whatever sources.  My intuition based on my research is that the liberalised market in the UK has not been a success, and the industry would have been better managed as a state monopoly.  This is the consensus in the EU where ambitious plans to liberalise Europe's energy industry have been quietly dropped.  At the moment the public opinion of the UK energy industry is on a par with their opinion of investment banking, and this morning the news was full of concerns over the industry.

I am currently working on a research project to develop a methodology that can evaluate the effect that different power storage technologies will have on the UKs power system.  These storage technologies are needed because wind power generation is intermittent and cannot  be relied upon to deliver power when and where it is required.  Texas is famous for having installed a lot of wind generation capacity, unfortunately this does not produce power on hot, still, still summer days when the Texan people want their air conditioners on.  Existing technologies to resolve the problem, such as new transmission lines, are costly, as reported by the New York Times as long ago as 2008, and were still an issue in New England last year.  A focus of UK Energy research is to develop storage technologies that enable the integration significant (intermittent) renewables, which is a more robust solution than relying on transmission (the UK has less of an issue with power transmission that the US, a result of the system having been developed by a single state body).  Without these technologies it is unclear how wind-power can significantly replace carbon intensive generation.  Suggesting it is a "done deal" and simply a matter of incentives that renewables can replace conventional generation is a dangerously mis-leading since it creates false expectations; dreams deferred.  I recall hearing of research that identified a  link between the proliferation of reported "cures for cancer" and a decline in trust in medical research, since the public experience is that cancer is not "cured".  The public like scientists but they also want honesty from us.

The impression I wish to convey is that the claim that

You can generate electricity using a coal-fired plant, but you can also use a gas-fired plant, a wind turbine, or solar panels.

is a bit glib.  The technologies exist in theory but do they do so in practice?  This is nothing new, those with access to academic journals could have a look at a special edition of Energy Policy (Volume 38, Issue 7,in particular the editorial and Market protocols in ERCOT and their effect on wind generation). I suggest that there is evidence that my original claim is sound.

Krugman makes things somewhat worse for himself when he argues that

You can drive a conventional SUV, but you could also drive a hybrid, or for that matter a smaller vehicle that, say, emits half as much carbon as the SUV

Just as the UK preceded the US in liberalising its energy markets, it has developed economic incentives to encourage people to switch from high carbon emitting vehicles to low carbon emitting vehicles, principally through two mechanisms, the fuel price escalator (since 1993, a Conservative initiative) and car tax differentials (since 2005).  The fuel price escalator is controversial and anyone who is interested in the details, and why I am sceptical of the "fairy dust", they could read a Parliamentary briefing on the UK debates.  To get a gist of the issue, and why there is broad support for the suspension of the escalator even amongst parties with strong "green" credentials such as the SNP and Liberal Democrats, consider the situation of a low-skilled worker living in rural Britain.  During the down-turn such people were liable to have to travel 50+ miles to work and earn a living  and could only rely on private transport.  If they did not have wealth they typically buy second hand, old,  "dirty" cars; they do not have the resources to "choose" to buy a clean, low cost, hybrid -UK car prices are clever, the price of "workaday" cars often reflects their present value; if a car has low running costs it is usually more expensive to buy.

In reality the poor do not really have choices.  One is reminded of Rousseau's recollection

 of a great princess who was told that the peasants had no bread, and who responded: "Let them eat brioche."

Academics do themselves no favours by offering unworkable solutions.  I am committed to carbon reduction - I spend time researching technical solutions - but I am also committed to helping those in "energy poverty".  If intellectuals spend time telling the public what they out to or ought not do without considering how those commandments affect others with less influence, they will lose the public's confidence.  If science is to maintain its high status I think it should be wary of ascribing criticism to "a toxic mix of ideology and anti-intellectualism".

There is a story that John Dewey's philosophy was inspired by being forced to spend time talking to "regular people" on a broken down train.  Along with the other pragmatists he argued that

The value of any fact or theory as bearing on human activity is, in the long run, determined by practical application - that is by using it for accomplishing some definite purpose. If it works well - if it removes friction, frees activity, economises effort, makes for richer results - it is valuable as contributing to a perfect adjustment of means to end. If it makes no such contribution it is practically useless, no matter what claims may be theoretically urged on its behalf.

I remain to be convinced that the important problem of carbon emissions can be resolved by economic incentives, the story is more complex and should be treated with respect.

Dogmatic Indifference

Last week Roger Pielke Jr had a letter to the FT published where he questioned the effectiveness of a carbon cap in China.  Paul Krugman responded to Pielke's letter with a post where he claims that

the letter offers a teachable moment, a chance to explain why claims that we can’t limit emissions without destroying economic growth are nonsense

 I am neither a climate scientist not an economist, but none the less I will offer my opinion on the debate because I think it offers a "teachable moment" of the perils of dogmatism in policy formulation by relating this discussion to my reflections on a meeting I had attended, hosted by the University of Edinburgh's Institute for Advanced Study in the Humanities, as the debate was going on.

Pielke based his argument on the "Kaya identity".  What is interesting as a mathematician is Pielke is talking about an "identity" not a "model".  For example E=mc^2 is a model (or definition), and identity is a stronger statement, basically what is on the left hand side of the equation is identical to what is on the rhs.  The Kaya Identity is a straightforward tautology, the lhs is "CO2" (carbon dioxide emissions) the rhs is

P * GDP/P * E/GDP * CO2/E

Noting that "P" (population) "GDP" and "E" (energy consumption)  are all in the numerator and denominator the rhs can be re-written

1*1*1*CO2.

The analytic value of the Kaya Identity is that it decomposes the human impact on the environment into three factors: population, affluence (GDP/P) and technology (CO2/GDP) which is divided into "Energy Intensity" (E/GDP) and "Carbon Intensity" (CO2/E).  Pielke's argument is that by fixing "CO2" (the rhs) implies that for GDP/P (affluence) to go up there needs to be reductions caused by technological changes (Carbon and/or Energy Intensity go down). This seems like a sound argument to me, but I am no expert.

Krugman's response to Pielke's letter is

This is actually kind of wonderful, in a bang-your-head-on-the-table sort of way. Pielke isn’t claiming that it’s hard in practice to limit emissions without halting economic growth, he’s arguing that it’s logically impossible. So let’s talk about why this is stupid.

The point to note here is that Pielke is not arguing that it is "logically impossible to limit emissions without halting economic growth" he is arguing that it is "logically impossible to limit without halting economic growth or creating new technologies".  Perhaps because Krugman is an economist he is overlooks the need to create technology here, physical things that have tangible effects.  Krugman goes on to say

Yes, emissions reflect the size of the economy and the available technologies. But they also reflect choices – choices about what to consume and how to produce it, choices about which of a number of energy technologies to use. These choices are, in turn, strongly affected by incentives: change the incentives and you can greatly change the quantity of emissions associated with a given amount of real GDP.

and at the end of the piece

 Let me add, by the way, that Pielke’s fallacy here – the notion that there’s a rigid link between growth and pollution – is shared by some people on the left, who believe that saving the planet means that economic growth must end. What we actually need is a change in the form of growth – and that’s exactly the kind of thing markets are good at, if you get the prices right.

What strikes me is that Krugman seems to believe that by sprinkling the fairy dust of incentives over society the emission busting new technologies will emerge.  This is a bit too deterministic for me.  Furthermore there is a blind faith in the power of markets.  This is problematic for a number of reasons, firstly European Cap and Trade policies are widely regarded as a failure, though market advocates would point to a problem of design (Fac me bonum, deus meus, sed noli modo-Give me chastity and self-control, but not just yet).

There is a more problematic criticisms of market mechanisms; their morality. Cap and trade enables a polluter to pollute by paying a penalty - they are in effect the indulgences that the Medieval church was criticised for.  The problem is that CO2 emissions in Europe, China or America have the potential to impact on the well being of future generations in Africa or Indian or Pacific Islands.  It is not clear how the payment of the penalty by the polluter will mitigate the suffering of the people affected by the pollution.  The operators of Heathrow airport benefit from the operation of the airport, the people living around the airport do not benefit from it.  The question is: are we entitled to buy and sell permits to pollute? in the same sense as are we entitled to buy and sell humans?

Krugman might baulk at the comparison, but Michael Northcott, the Professor of Ethics at Edinburgh, might not. Northcott gave a presentation at the IASH meeting where he made a case against capitalism because capitalism insisted on GDP growth at the lowest cost, which resulted in pollution.  Northcott builds his argument, in part at least, on Political Theology.

Since I base my arguments for seeing markets as centre of communicative action on rejections on two key components of Political Theory, Schmitt's views on sovereignty and Adorno's criticism of modernity, it is unlikely that Northcott and I will agree.  It is not peculiar for Northcott, as a minister of the church, to be attracted to Schmitt's neo-Hobbesian attitudes that the sovereign's authority has precedence over the (liberal) law, since he will believe in the sovereignty of a god.  My work on the nature of the markets rests heavily on Cheryl Misak's Truth, Politics and Morality, which is an explicit rejection of Schmitt in favour of liberal pluralism.  Another basis of my work is Habermas' rejection of the negativity towards modernity in the Dialetic of the Enligthenment.

Krugman and Northcott agree on the policy: that carbon emissions should be capped, but they do so from very different ideological positions.  Northcott from the theological dogma of "thou shalt not because I speak with the authority of a transcendental god", Krugman from the economic dogma "thou shalt not because the market will deliver us from evil", but both dogmas are in opposition to each other.  This dissonance, I believe, enables those who oppose climate change mitigation policies to focus on the ideology underpinning the justification for carbon caps rather than the factuality of the dangers of carbon emissions.

Another speaker at the IASH conference, and the person who invited me to attend, was Paolo Quattrone.  Paolo shares, from the perspective of accounting, my view (ideology, if you like) that

financial markets are, and should be treated as,  centres of communicative action with the purpose of achieving a consensus on the ‘just’ price of assets in an uncertain world. In this framework, markets should operate on the basis of norms of discourse, such as reciprocity, sincerity and charity. My argument focuses on a discussion of how the norm of reciprocity is deeply embedded in the Fundamental Theorem of Asset Pricing, the foundational theory of mathematicians working in finance. A key conclusion is that, in this framework, mathematics provides the discursive language, rather than being a truth-bearer. 

Paolo has researched Jesuit accounting practices where the financial accounts were a tool for reflection, rather than  a statement of fact.  This approach was a feature of Italian accounting practices (GAAP) until there was global standardisation of GAAP and meant that in the 1960s Italian accounts involved facts, based on market prices, and less certain valuations based on judgement.  The emphasis of the accountant was to reflect on the less certain aspects of the accounts.  Today there is an emphasis on "objective" market prices, and where these are unavailable "model" prices.

Paolo also highlighted a feature of Jesuitical practice; that the Jesuit must be "indifferent".  The immediate interpretation of this is that the Jesuit does not care, but Paolo explained it meant that the Jesuit had to be "rational" "in difference".  That is, the Jesuit had to be concious of the different ideologies around them and come to a judgement on the basis of this conciousness.

I think this "in-difference" concept is important for scientists in the climate debate.  It is not the same as "apolitical", since arguing for climate change mitigation actions is arguing for policy, which is political. The role of the scientist should be that of the "indifferent" questioner who challenges the claim, irrespective of its ideological basis.   In this respect Pielke, in challenging the assumption that a carbon cap would work, is playing the correct role of a scientist.

This is important because in a liberal democracy policy decisions need to be justified.  This is not the same as a majority needs to accept a policy, my understanding is that around 60% of the population of western democracies accept the need for climate mitigation policies, but a small minority challenge them.  For the policies to be "democratically valid" they need to be justified to the minority not accepted by the majority.  The opening quote to Karl Popper's The Open Society and Its Enemies is from Pericles

Although only a few may originate a policy, we are all able to judge it. 

It is against the Open Society to condemn challenges to policy.

Cheryl Misak's justification for liberal democracy is because it is through deliberation that the best decisions are arrived at.  Pielke is challenging the claim that carbon caps will lead to a better society because it demands the policy is justified (deliberatively). In challenging it, those who advocate the cap must respond to the criticism, not reject the criticism on the basis of divine or economic authority.  If they do not respond the public cannot be sure that the policy is the "best" policy and doubt will prevail.

I note that Krugman appears to have stepped back from his position last week. Interestingly, he, like me, identifies the issue as being "ideological", but I suspect he sees himself as being a "scientist" and above ideology.

What makes rational action on climate so hard is something else – a toxic mix of ideology and anti-intellectualism.

and then at the end of the piece

 The fact that climate concerns rest on scientific consensus makes things even worse, because it plays into the anti-intellectualism that has always been a powerful force in American life, mainly on the right. It’s not really surprising that so many right-wing politicians and pundits quickly turned to conspiracy theories, to accusations that thousands of researchers around the world were colluding in a gigantic hoax whose real purpose was to justify a big-government power grab. After all, right-wingers never liked or trusted scientists in the first place.

So the real obstacle, as we try to confront global warming, is economic ideology [I take this to be market libertarianism] reinforced by hostility to science. In some ways this makes the task easier: we do not, in fact, have to force people to accept large monetary losses. But we do have to overcome pride and willful ignorance, which is hard indeed.

 On the one hand Krugman be-moans the anti-intellectualism of America, but I see America's scepticism towards academic (and theocratic, plutocratic, aristocratic) authority as part of the bed-rock upon which its democracy is built.  The vast majority of the public respect and admire science and scientists, but there is also a legitimate concern that cloistered and wealthy academics are imposing un-justified policies on the public.

The evangelical right might ask "What would Jesus do?", maybe the academic left could similarly ask "What would Pierce/James/Dewey do?" when faced with a doubtful public minority.

Scientific facts and democratic values

I spoke at the Circling the Square conference last week, keeping closely to the text I put up before I went to Nottingham.  The most significant change was that I ended with a comment on a claim made by an experimental physicist (hereafter labelled as "EP")   the previous day that "E=mc2 is a fact" and was on the following panel where he argued that "Science is  not democratic".  I want to explore these two points.

As a mathematician, E=mc2 looks like a model, and I come from a tradition that lives by the aphorism that "all models are wrong".  But this is simplistic, a better argument is presented by Poincare, who is an authority I suspect that EP would be reluctant to dismiss with the confidence that they dismiss sociology.

Poincare is difficult to read, because his approach is to take ironic positions that he then dismantles.  In Chapter 6 of Science and Hypothesis he does this with the playful statement

The English teach mechanics as an experimental science; on the Continent it is taught always more or less as a deductive a priori science.  The English are right, no doubt

He then proceeds to cast doubt on that indubitable statement.  Poincare notes that the issue is that

treatises on mechanics do not clearly distinguish between what is experiment, what is mathematical reasoning, what is convention and what is hypothesis

Over a hundred years on physicists are still unclear about these things, something that annoys sociologists.  Later, in Chapter 8, Poincare untangles the difficult concept of energy, and it is in this context that I asked the question "Is E=mc2 a definition", if this is the case and we associate facts with definitions we are close to Nominalism.

In response, the EP raised a cup as if to drop it and the claim was made that it will accelerate at 9.81.. m/s2 and this was a fact, known within definite errors.

A fact with error bars on it, mmmm.  Not convincing.

The point is this fact, even with error bars, is dubious.  I worked in the oil industry and one way of prospecting is to search for gravity anomolies, that is to make money by looking for where the model fails.

Thus far EP has failed to justify to me that physics is based on facts, but I still believe in physics.  What is my reasoning.

In Chapter 7 of Science and Hypothesis Poincare asks the reader to imagine a planet that is covered with thick clouds, so much so that they cannot see the stars.  He then argues that, at some point, a Copernicus will "come at last'' to the planet and would argue that

 It is more convenient to suppose the earth turns round, because the laws of mechanics are thus expressed in much more simple language. 

and then he goes on to say

these two propositions "the earth turns round,'' and "it is more convenient to suppose that the earth turns round,'' have one and the same meaning

This statement was picked up by a mathematician and  philosopher, Edouard LeRoy. LeRoy was a friend and follower of the philosopher Henri Bergson, who is associated with philosophical irrationalism and  LeRoy believed that science "can teach us nothing of truth; it can only serve as a rule of action'' and, following Bergeson,  "the intellect deforms all it touches'' and is a version of Nominalism.  Poincare was forced to write his second book The Value of Science  where he clarifies his earlier work and argues, passionately, for the value of science.

Poincare starts by arguing that science is not simply a 'rule of action' in the same way that there are rules to a game,

[If science has] a value as `recipes' have a value, as a rule of action, it is because we know they succeed, generally at least.  But to know this is to know something and then why tell us we know nothing?

He then goes on to distinguish a 'crude fact' from a 'scientific fact'

The scientific fact is only the crude fact translated into a convenient language. 

Poincare observes that the convenient language could be French or German (or  Euclidean or non-Euclidean geometry), but the point is that, in science at least, a French speaker could come to understand German, "because there remains between the French and Germans something in common, since both are men''.  The nominal language that scientists use is only a convenient veneer on the universality of science.

Poincare then goes on to answer the fundamental question: What is science? and offers the following

 it is before all a classification, a manner of bringing together facts which appear separate, though they were bound together by some natural and hidden kinship.  Science, in other words, is a system of relations.  Now, ..., it is in the relations alone that objectivity must be sought

followed by

 Therefore when we ask what is the objective value of science, that does not mean: Does science teach us about the true nature of things? but it means: Does it teach us about the true relations of things? (my emphasis)

The equivalence of the statements "the earth turns round,'' and "it is more convenient to suppose that the earth turns round,'' is a consequence of the relativity of space.  To state that either "The earth turns around'' or "The earth does not turn around'' only has meaning if space absolute, and not if science is about relations of things.

Having set the scene with Poincare, to entice the EP in,  I will run forward to modern philosophy.  Susan Haack gives us the metaphor of knowledge (scientia) as a crossword puzzle, we answer some clues and infer others.  For example if in my crossword I see the letters "f_l_c_t_" I am justified in filling in "felicity" (without referring to the crossword clue), just as a physicists are justified by filling in "E=mc2" in science.  But, if I find the answer that gave me the "l" is wrong, I have to re-visit "felicity"; it could be "ferocity" or "frascati".  Metaphorically, my issue with multiverses is that I feel physicists are solving  the clue with "fulocite" (rhymes with "full of ..."); inventing a meaningless word to fill in the blanks.

Haack is not immediately interested in the natural and physical sciences, her main concern is the law and how science influences legal judgements (which is itself related to the topic of the conference).  The reason Haack, Poincare and I take this line in knowledge is that we want science to take a central role in policy making.  This implies we cannot be exclusive in our definition of science as that which relates to nature.

What I mean by this is I believe it is equally justified to claim the "E=mc2" and that "Raping three year olds is wrong" and I need to have a framework that acknowledges the equivalence of these claims.  The reason I use an extreme example is that the question of raping children is clearly predominantly a moral question, so what I am claiming is that my intellectual framework needs to be equally robust in supporting "facts" as "values".  I cannot immediately justify either claim, I rely on a confidence that I can discover robust justifications.  Furthermore, I would conject that the proportion of the British population who reject both claims is similar, and more controversially that there is an overlap in the groups.  My basis for the second claim is in the recognition of a link between emotivism, that moral statements are essentially emotional, in moral philosophy and relativism in philosophy more generally.

Now the sting in the tail:  emotivism is closely related to logical positivism, notably through the work of A. J. Ayer.  I see a connection between logical-positivism, that the only truths are those that can be verified through experimentation, with emotivism, that moral statements are propositionally empty,  with relativism, that there can be no absolute justification for a claim.  If you take the logical positivist out of the laboratory their position, for me, becomes untenable and relates to the relativists they typically despise.  N.B. Do not quote this argument in a 101 Philosophy paper.

Why do I care?  Why do I need to employ a framework that acknowledges the equivalence of the claims?  The reason is that, like Haack and Poincare,  I believe that scientists have a role in policy.  I finished my statement at the conference with the hyperbole that the Credit Crisis was caused by people who are committed to the idea that E=mc2 is a fact.  Let me explain.

Since the 1980s investment banks have been actively recruiting, at an increasing rate, graduates from science, technology, engineering and mathematics backgrounds.  The reason was the increasingly quantitative nature of finance.  This was not new, there has always been a strong relationship between science and finance that had become overshadowed between 1914 and 1970 when states set exchange rates deterministically.  Finance gained much from these graduates, but they came with baggage, they believed in the truth-bearing nature of mathematics and did not recognise an ethical dimension of the equations they employed.  As the Financial Crisis Enquiry Commission reported, the Credit Crisis was a result of "a systemic breakdown in accountability and ethics".  It was not the mathematics that was wrong it was the moral context in which they were used. In response,  my work since 2010 has centred on un-covering the ethical dimension of the abstract mathematics employed in finance.

Something that struck me at the Conference was the extraordinary status of finance and economics.  I plan to explore this in a future post - I need to check what people actually said on the recordings rather than rely on what I think I heard - but for the benefit of those who were not their it came up a number of times that no-one, from the Parliamentary Office of Science and Technology, the government's scientific advisers, academics and so on, challenge the basis of financial decisions.  This is extraordinary because modern policy decisions are based primarily on economic arguments.    For example, the Stern case for taking action today to mitigate uncertain climate change in the future rests on taking an unconventional financial position.  As economists are reluctant to take this position, there is never an economic case in favour of many mitigation strategies.  In un-covering the ethical dimension of the abstract mathematics employed in finance I present a case for Stern's position.  If there is no questioning of the financial basis of policy decisions, most of the discussion about scientific advice is redundant.

As something of an aside, but an issue that came up at this conference and after the Mathematical Cultures meeting is the widespread belief that the root of science's problems is "neo-liberalism".  I have explained a number of times that "neo-liberalism" is a technical term relating to a synthesis of statist and classical liberal policies.  The financialisation of academia, taking it from public to private control,  is a return to "liberal" policies.  There seems to be a reluctance to associate what is bad with policies that originate, in part,  with Bentham and Mill.  One academic responded "Well at least we've never had "liberal" governments then".  The problem is we have.  The British policy of Russell's government in response to the Irish Famine from 1846 was classically liberal and perceived as being "scientific" (in accordance with Mill's conception of political science) at the time.  Peel's Tory policy had been both less liberal and motivated by Christian charity and is usually perceived as humane, but flawed.

This leads me on to the second statement by EP: Science is undemocratic.  Given that I had made the point that, as a bystander, I think that the climate debate has degenerated into one of seeing which camp can have the most peer-reviewed papers published, suggests that we are in agreement.  Maybe, but not in how to present the case.  I argue that the issue is inside academia - it is about getting papers published, EP suggests the problem is outside the academies, in the public space.

Claiming "E=mc2 is a fact" and "Science is undemocratic" are both problematic: the first is open to challenge, as I have done, and if it looks invalid it undermines subsequent claims.  The second raises in the hearers mind, if it is not democratic, what exactly is it: technocratic? plutocratic? theocratic? In my work I identify a correspondence between good scientific, democratic and commercial practice.  I build this case on Cheryl Misak's Truth, Politics and Morality, which, according to the publisher, "argues that truth ought to be reinstated to a central position in moral and political philosophy": nothing woolly there.  Misak's argument is essentially that if we are to arrive at something we can call truth we must put our claims up to be challenged; this is the democratic ideal.  The very fact that EP embarks on an admirable crusade to challenge published work demonstrates that they advocate that science is democratic: they are rejecting the autocratic authority of the journal and the peer review process.

Poincare suggested that what distinguishes the scientist is their ability to ask the right questions, not their ability to deliver the right answers.  My feeling towards the end of the Circling the Square conference that academics seem to be becoming very introspective.  When EP claims that "Science is undemocratic" they are talking to other academics, not to the broader public. The discussions focussed on climate science, particularly geo-engineering and the badger cull.  As Sheila Jasanoff pointed out, the academics' main mechanism for affecting climate policy, the IPCC,  has failed and we should move on to thinking of something workable while someone else pointed out that public opinion on the fate of British badgers was clear: we don't care.  I was left thinking that academics are fighting amongst themselves over the scraps under the table, when the juicy joint has been left unguarded on the table.  All this was going on while  a significant portion of the European public was going to the polls and giving the establishment, of which publicly funded academics are part, a significant vote of no confidence.

Piketty and the problems of data interpretation

I have not read Piketty, but like many in my position I will not let that stop me talking about the debate of his book focusing on data interpretation.

After leaving university I worked for a number of oil industry related consultancies, the formative time being spent with a firm that made their money by providing expert witness testimony in legal disputes around the revenue split from oil fields that crossed legal, often and lucratively international, boundaries.  The charismatic founder of the consultancy, a Napoleonic Inverness-ite, liked to tell the junior technical staff that lawyers started with a case and gathered the evidence, where as scientists gathered the evidence to build a case.  Now that I am older I wonder if this was more nuanced than I imagined in my twenties: scientists will gather evidence in order to answer the question at hand, they do not, as Francis Bacon seems to suggest, just gather the data and watch the science precipitate out of it.

In the early '90s the firm realised that there was money to be made in 'data management': collating the information on an oil reservoir, cleaning it up and delivering it to oil companies for their technicians to interpret.  The boss was happy to provide this service for paying customers, but for the consultancy work of his firm, the interpreters gathered and cleaned up the data.  The reason for this is that in the process of collating the information the interpreter develops deep tacit knowledge of strengths and weaknesses in the data that goes on to  inform the interpretation.  Most data sets are incomplete, clearly contain errors and in the process the interpreter needs to make judgements about how the data is manipulated to make it coherent.  Understanding this helps in the analysis.

The Financial Times has identified manipulations in Piketty's data set, and no doubt the journalists who did this felt they were on to a significant scoop relating to the intellectual phenomena of the year.  I think this highlights the journalist's unfamiliarity with the scientific process rather than problems with Piketty's work.  I am immediatley reminded of Pierce's pragmatic metaphor of science: it is a cable not a chain.  What this means, is that a chain fails when a link breaks where as a cable can suffer the breakage of a number of strands before it fails.  The evidence is the Forth Road suspension bridge that has microphones attached to its ageing cables counting the strands that have broken to inform on its integrity.

The FT journalists were able to identify the issues with the data because Piketty had made so much data available for review. It is difficult to criticise his science because of this basic fact.  The FT has raised doubts about the data, and he has responded with a justification, the justification that as someone experienced with interpreting data, I would expect.  Again his science is difficult to fault.  If we are going to claim that because he had to clean up the raw data, his conclusions are unsound, we need to be prepared to write of the vast majority of science, ancient and modern.  I would start with the discovery of the Higgs Boson, for example.  I think the UK (and possibly US) are in the midst of a real crisis of science because of the obsession we have with "the data" at the expense of the process (see my previous post).

I have not read Piketty's book but I will, I will do so on the basis that I am dubious about his conclusions and I base this doubt on an intuition that he believes that capitalism inevitably leads to wealth inequality.  I see this is a marxist (as distinct from Marxist) interpretation that rests on a sense of determinism.  I believe that capitalism can take on many characters, just as eating is done differently in East Asian and West European cultures.  In this respect we can construct a capitalism that does not lead to wealth inequality. (Of course, this may rest on how capitalism is defined, if it is defined on the basis of profit maximisation rather than market exchange, there is no hope for capitalism, in my opinion).

Is it robust knowledge or make believe? Evidence, uncertainty and the role of values.

I am participating in the "Circling the square:Research, politics, media and impact" conference next week and I am collecting my thoughts.  This is a preview of my opening statement.

A few years ago I attended a meeting on the applications of mathematics to "energy problems" sponsored by the Engineering and Physical Sciences Research Council and the London Mathematical Society.  During one of the presentations a British Nuclear Engineer noted that in France they do not employ probabilistic arguments in favour of nuclear power because probabilistic arguments are too advanced for the public.  Two people who did not snigger at the ignorance of the French were myself and the senior probabilist at the University of Oxford.  We understood the French position: mathematical probability is a branch of mathematical analysis.  The British, by and large, associate probability with statistics, counting things and calculating relative frequencies.

The difference is captured in the different words we use for the English mathematical term 'expectation', the French use the word espérance, with the literal translation of hope.  Since the Latin root of expectation is associated with waiting, and in the past 'expect' and 'wait' have been used synonymously (i.e. Dickens's Great Expectations), we can infer that there is a tendency for the English speaker to anticipate a mathematical expectation, where as a French speaker merely hopes for it.   Similar issues exist within English for the words 'risk' and 'uncertainty'.  An economist will usually interpret a risk as calculable chance, a physicist might view an uncertainty as an error rather than something undependable.

I sometimes distinguish mathematical probability from statistics by using the analogy of hope (Spes, Elpis) and faith (Fides, Pistis).  Most theologians agree that faith is necessary because there is doubt: statistics is a necessary part of science because our results are doubtful.  Statistics provides a justification for our doubtful claims based on what has happened in the past.  Probable also implies provable and true, but where as statistics has an empirical angle, probability has a more metaphysical aspect.  This was exemplified in the medieval genesis of probability in the context of jurisprudence where conscience and moral certainty were key issues, issues that were still important in Bernoulli's The Art of Conjecture and through the eighteenth century discussions of the Petersburg game.  They disappeared in the post-Laplacian conception of probability.

One of the original purposes of probability was to price contracts and it did this by considering ratios, on which justice is based, this is present in Aristotle's Nicomachean Ethics.  The word 'rational' is derived from 'ratio' and is associated with reasons and accounts: justification.  Mathematical probability emerged in the mid-seventeenth century as a result of centuries of discussion around the morality of commercial contracts.  When Huygens coined the term expectatio in the first treatise of probability he did so in to context of establishing the fair, or just, price of a contract.  If we win £10 on a head and £2 on a tail the expectation of the coin toss, its fair price, is £6. We can not 'expect' to win £6 because it will never happen.  I argue that this ethical dimension to probability is still implicit in Financial Mathematics, but not recognised.

My main point is, the mathematics of probability and statistics exist because we need to justify our claims.  My secondary point is that historically, there was an explicit moral dimension to the process of valuation that became obscured in the nineteenth century, at the same time as episteme came to dominate discourse (before Foucault).

If the question was "Is it episteme or make believe?"  I think the question would be wrong.  Firstly the dichotomy is false.  It is not a choice between "scientific" or "true knowledge"  and "make believe" it is a problem of deciding on the best course of action in the uncertain, undependable, world outside a controlled laboratory.   Aristotle distinguished  episteme, passive knowledge from phronesis, active thinking and I think the issue pertinent to "Research, politics, media and impact" is robust thinking rather than just robust knowledge.  The antonym of "make believe" is not "true belief" but "justified belief" and, it is my opinion, that science should focus on the manner of its justifications rather than its results.

 Re-emphasising  phronesis, with the aim of good, virtuous, living, might be worth considering in light of our experience of the Financial Crisis, which highlighted that scientific knowledge is not as robust as many of us would like to believe.  For example, most of the research in Financial Mathematics has been focused on establishing the "true" price of a contract, some of my work is about re-orientating the discipline to focus on the principles that make thinking robust, given that we cannot rely on certain knowledge in an uncertain world.  For example, I argue that the origins of Financial Mathematics are in the synthesis of the virtues Faith, Hope and Charity (Caritas, Agape).  I am not alone in thinking this way, Rethinking Economics argue that

It is clear that maths and statistics are crucial to our discipline. But all too often students learn to master quantitative methods without ever discussing if and why they should be used, the choice of assumptions and the applicability of results.

I interpret this as it is not the tools of mathematics that are important, but how they are employed.  This observation is as pertinent to most students and their teachers.

My motivation for these comments originates in a conversation I had before the crisis about the use of mathematics in finance.  Basically  mathematical models were being used as rhetorical devices: if a trader had a "better" model than the risk manager, they could do what they wanted to; the trader didn't necessarily believe the model but justified their actions.  This idea emerged in the Bank of England's testimony to the Parliamentary Commission for Banking standards

unnecessary complexity [of mathematical models] is a recipe for […] ripping off […], in the pulling of the wool over the eyes of the  regulators about how much risk is actually on the balance sheet, through complex models. 

The existence of a model was enough, there is no understanding of how it works, how it justifies.

More generally I sense a connection here to issues around, for example, climate science.  As a bystander I feel that the climate debate is one of which camp has the larger collection of peer reviewed papers wins.  There seems to be little rational discourse of making a claim, challenging a claim, justifying a claim.  The claim, if published, stands as a fact. The problem is that while many academics are judged on their ability to create facts, a collection of facts is no more science than a collection of bricks is a house.  Le savant doit ordonner, the role of the academic is to turn the facts into `science'.

Objections to Objectivity

I start with a warning that this is a synthesis-in-development of some thoughts about mathematics, economics, objectivity and justification.  As a work in progress it might be a bit incoherent.  I have been thinking about "justification" having read Cheryl Misak's Truth, Politics and Morality on the advice of the pragmatist Matthew Festenstein when giving me feed-back on my Reciprocity paper.  Matthew had identified a relationship between the influence on seventeenth century commerce on politics (his field) and finance (my interest) and given it takes place in the seventeenth century there is a third node: science.

Following reading Misak I went to Susan Haack's Putting Philosophy to Work that discusses science in the context of pragmatism.  Misak and Haack got me thinking that fundamental to the pragmatic conception of politics and science, and by induction, finance, is the idea that in making a claim you put it up for criticism, if there is no criticism the claim passes but if it challenged the claim needs to be justified in a discursive manner.  Eventually a consensus is reached.  The problem for philosophy is under what conditions can the consensus be regarded as truth.  Clearly a "democratic" conception that 51% signifies truth is inadequate, and this opens the door to wondering if 90% of "scientists" signifies truth or if the "market" determines truth.

With this in mind I attended a workshop on Mathematical Cultures during which Norma Beatriz Goethe gave a talk on Leibnitz.  What caught my attention was in the pre-amble Norma discussed how in the mid-seventeenth century there was a tradition of representing the scientist as a spectator at a theatre, with nature being what occurred on the stage.  This was interesting to me because one of the cornerstones of pragmatism is the rejection of the Cartesian belief that the scientist can be an objective observer of the world.  This is a reasonable working hypothesis for the physical sciences, but begins to break down in the natural sciences (the "anthropocene"), is dubious in the social sciences and untenable in the human sciences.

However, what really caught my attention was an illustration in this vein which had the "scientist" in a room that enabled them to eavesdrop on those around them, with massive "hearing horns" and spyglasses observing activities in a public space.  What struck me was a correspondence between these prototypical conceptions of science, the scientist as the observer, and recent crises of mathematicians working for security services monitoring the public's activity.

My talk, in order to justify its place in a discussion of Mathematical Cultures, centred on financial mathematics as a language to facilitate discourse rather than the more popular conception as the key to unlocking the secrets of financial markets.  A concern I share with many applied mathematicians - and regulators - is that contemporary financial mathematics has become too complex to be useful.  However, more pertinent is the fact that research mathematicians might become irrelevant because in the markets there seems to be a paradigm shift away from sophisticated models to simpler models that incorporate  CVA - a basic accounting tool abhorrent to a PhD trained quant.  Though I am sure us mathematicians could, given time, make CVA incomprehensible to the uninitiated as well.  I note with interest that Mark Davis (my mathematical grandfather) is questioning mathematicians' objections to VaR as a risk measure and re-poses the mathematical question: "Instead of asking whether our model is correct, we should ask whether our objective in building the model has been achieved."  I suggest we can interpret this as a statement that we do not require objective justification for the validity of the model, rather we need a subjective, i.e. relative to our aims, assessment. The mathematician is an actor on the stage of finance.

Twitter alerted me to two posts by @MarkThoma.  One from last year makes the observation that

We like to think or ourselves as scientists, but if data can’t settle our theoretical disputes – and it doesn't appear that it can – then our claim for scientific validity has little or no merit.

while one from yesterday is titled 'Pretending To Do Something Like Science'??? and is a quote from Paul Krugman

Were the freshwater guys always just pretending to do something like science, when it was always politics? Is there simply too much money and too much vested interest behind their point of view?

Both these posts, and Mark's presentation, (implicitly) ask the question "what is science", a question that dominates much of my thinking as a "scientist" working in finance.

With regard to Mark Thoma's 2013 post, Poincare was always sceptical of the Anglo-Saxon obsession with "facts", "facts are to science what bricks are to houses: a collection of facts is no more science than a pile of bricks is a house".  In this setting mathematics has the role of mortar or cement, identifying the relationships between facts and linking them together.  Something else I learnt from Poincare is that mathematics is essential when you cannot perform an experiment: Higgs' mathematics being proved by the Large Hadron Collider is an example.  This is why mathematics is essential for economics and finance: because we cannot experiment in economics because the system is so dynamic we need a way of disentangling the myriad of facts that we are presented with.

The main point of the 2013 post is that economic mathematicians cannot agree on "one model" for the economy.  I would suggest is that Thoma is wishing to place economists in the audience where they can objectively deduce the "true" model for the economy that enables its control.  I would suggest a better aim is to follow Mark Davis' lead and evaluate different models on the basis of the aim in mind, different aims will require different models, but now single model can accomplish multiple aims.  Anyone who recognises Mark Thoma's predicament could do worse than read three of Poincare's essays: "The Mathematical Sciences" and "The Objective Value of Science" from The Value of Science and "The Scientist and Science" from Science and Method.

I think Paul Krugman's frustration with the "freshwater guys" more troubling because it is a symptom of a general degradation of science.  I worry that scientific discourse has degenerated into the accumulation of publications.  For example. I have been critical of an important (because it is cited) paper on financial stability.  My issue is that the authors - physicists - construct a discrete-time/finite state economy that they show becomes unstable when the number of assets traded is four times the number of possible states.  Cramer's Rule tells me that as soon as the number of states equals the number of assets, the economy becomes deterministic (it is 'complete'). One of the authors responded to my criticism, which was nice.  But what troubled me was this attitude

As for any paper, there is a time to defend it, which is when it is submitted to a journal and it goes to the referees. Once published, it should defend by itself. 

This implies to me that the author believes that a claim is "justified" if two or three (like minded) individuals   agree with what is claimed.  My criticism need not be considered, and if I have a criticism I should not raise it publicly, but privately.

I think beliefs like these are at the root of Krugman's concern.  If my friends and I can come up with a coherent set of claims that we can get peer-reviewed and published, they justified. I do not have to justify my claims to criticism, particularly external criticism.  This is not a problem of economics but much of what is currently perceived as science: it is a feature of the climate debate and pharmaceutical research.  It is damaging to science but corrosive to society as a whole where politics is dominated by the sound bite and "fact" with little effort or interest of many politicians to justify themselves.  I believe the popularity of UKIP, the 'Tea Party' and Front National are the consequences of  mainstream political leaders to justify their claims in any meaningful way.

My objection to objectivity is that it elevates the scientist to a position of authority that cannot be challenged by non-scientists, or scientists that you do not disagree with.  Suggesting that scientists accept they acknowledge they are on the stage diminishes their authority, they become fallible, but in doing so I think we can actually solve problems rather than fail to control situations.

When being wrong is right

I attended the Mathematical Cultures workshop/conference a the London Mathematical Society at the start of the month where I presented Is fairness a mathematical concept in the context of how the culture of mathematics contributed to the Financial Crisis.  Specifically, I began my talk with this quote from the UK's Parliamentary Commission on Banking Standards Report (Volume 2)

89. The Basel II international capital requirements regime allowed banks granted “advanced status” by the regulator to use internal mathematical models to calculate the risk weightings of assets on their balance sheets. Andy Haldane described this as being equivalent to allowing banks to mark their own examination papers.  A fog of complexity enabled banks to con regulators about their risk exposures:

[...] unnecessary complexity is a recipe for […] ripping off […], in the pulling of the wool over the eyes of the  regulators about how much risk is actually on the balance sheet, through complex models. 

 (my emphasis) 

and I ended it with this clip from a 1999 BBC science program on Black-Scholes-Merton and the collapse of LTCM (the speaker is Paul Samuelson) (the clip starts at 12:20 in the original programme)

 

My observation is that there is a culture of mathematics being a magical language that unlocks the secrets of the universe.  This is captured in many popular representations of mathematics: in  Darren Aronofsky's film Pi, that links maths, kabbalah and finance

the Da Vinci Code

Marcus Du Sautoy's The Code

even Simon Singh's book on the Simpsons

(for those who don't want to buy the Simpson's book, there is a long standing web-site)

On Saturday, I listened to Bridget Kendall's show 'The Forum'.  Kendall is well known in the UK for having been the BBC's Moscow correspondent during the 1991 coup and rise of Boris Yeltsin, and then the BBC's Washington correspondent.  Less well known, she is the daughter of Britain's most important probabilist of the twentieth century, David Kendall, and her brother is a probabilist at Warwick - I suspect she has a good grasp of mathematics.

Kendall begins the programme by asking Max Tegmark, an MIT cosmologist, about the idea of "maths as a kind of key" in this excerpt starting at 2:35 of the programme.  Tegmark is committed to mathematical realism and believes that ultimately, mathematics enables us to "ultimately predict the future" (at 0:55 in the except, 3:30 in the original).

I see a strong connection between Haldane's criticism of the use of maths in finance and Samuelson's and Tegmark's mathematical realism.  To paraphrase William Tait's description of mathematical realism:

A mathematical proposition  is about a certain structure, financial markets. It refers to prices and relations among them. If it is true, it is so in virtue of a certain fact about this structure. And this fact may obtain even if we do not or cannot know that it does.

The maths makes the financial theory true.

Following the meeting Heather Mendick shared a post where she contrasts Will Smith being constrained by the mathematical fact that 2+2=4,

with Orwell's presentation that "Freedom is the freedom to say that two plus two equals four".

Heather sees Smith's approach as being an example of "extreme neoliberalism", (I think she means extreme liberalism), but I argued that there is a connection between Orwell's "freedom" to claim 2+2=4 in the context of empiricism and Will Smith's (I assume, metaphorical) rejection of 2+2=4 as a rejection of imposed authority.

What struck me when listening to The Forum was how the discussion developed immediately after the except above.  In this excerpt, starting at 3:41, Kendall asks Tegmark to explain how  accepting the rules of mathematics leads to a belief in parallel universes.  I have recently shared my views on multi-verses, and my belief is that they are a fiction resulting from an incomplete understanding of the mathematical physics.  Tegmark supports my view that multi-verses are a mathematical consequence but his Platonism forces him to believe in multi-verses.  In this context, comparing Will Smith to Max Tegmark, who is wrong in rejecting mathematical truths.  We all recognise Smith is wrong, even probably Smith, but at the same time it is difficult to reject what Tegmark argues, despite the fact that Kendall comments that to the "unititiated" it all looks like make-believe (at 2:30 in the except, 6:11 in the original).

We label Smith as "ignorant" for presenting the claim that 2+2=5 in the context of advocating people reject the status quo, but we are expected to believe in multiverses.  Haldan'e criticism (probably) referred to the London Whale, where by presenting mathematics traders at J.P. Morgan reduced the liability of a portfolio from $22 billion to $13 billion (I may be inaccurate here, but the order of magnitude is correct).  To the "uninitiated" it all looked like make believe, but, like multi-verses, it carries the authority of mathematics.

Something that always appealed tome about science is its iconoclasm: science is right because it is happy to destroy its icons and move on.  We criticise Smith but venerate Galileo for rejecting the Ptolomaic system, despite the fact he the Dialogue is spectacularly wrong on the tides (e.g. Aiton, Brown).  Galileo is wrong, as the Inquisition realised, but he was right.

If economics is real in the Platonic sense, and can be described by exact mathematical equations, it will eventually grind to a halt.  This was the concern of many economists in the first half of the twentieth century, Knight, Keynes and the Austrians all agreed on the significance of uncertainty and unpredictability in determining economic affairs.  The organiser of the Mathematical Cultures conference, the philosopher Brendan Larvour, remarked

"Piketty has written a marvellous, persuasive book that breaks with modern economics' love affair with mathematics" http://t.co/8oFvJhbsmO

— Brendan Larvor (@BrendanLarvor) April 28, 2014

a repsonse was

@brendanlarvor I was puzzled when I saw that remark. Piketty seems very mathematically sophisticated to me: http://t.co/tFVOhOdxav

— Matthew Inglis (@mjinglis) April 28, 2014

My response is that Piketty, a French economist, is mathematically sophisticated, but in a different way to that of the realists/Platonists like Samuelson and Tegmark.  My disquieting suggestion is that in order to prevent Financial Crises we really need to examine how tenable mathematical realism, and the science built on this basis, is.

PS A Tweet from a French mathematician quoting another section of the Guardian

"Piketty's sublimely nerdy book, packed with graphs, statistics and history..." http://t.co/Xf61IBoFKy "rock-star economist" by @moorehn,

— Arthur Charpentier (@freakonometrics) April 28, 2014

The Legitimacy of High Frequency Trading

Mark Thoma brought my attention to a post by Dean Baker, High Speed Trading and Slow-Witted Economic Policy.  High Frequency Trading, or more generically Computer Based Trading, is proving problematic because it is a general term involving a variety of different techniques, some of which appear uncontroversial, others appear very dubious.

For example, a technique I would consider legitimate derives from Robert Almgren and Neil Chriss' work on optimal order execution: how do you structure a large trade such that it has minimal negative price impact and low transaction costs.  There are firms that now specialise in performing these trades on behalf of institutions and I don't think there is an issue with how they innovate in order to generate profits.

The technique that is most widely regarded as illegitimate is order, or quote, stuffing.  The technique involves placing orders and within a tenth of a second or less, cancelling them if they are not executed.  I suspect this is the process that Baker refers to that enables HFTs to 'front run' the market.  Baker regards the process as illegitimate with the argument that

The issue here is that people are earning large amounts of money by using sophisticated computers to beat the market. This is effectively a form of insider trading. Pure insider trading, for example trading based on the CEO giving advance knowledge of better than expected profits, is illegal. The reason is that it rewards people for doing nothing productive at the expense of honest investors.

 On the other hand, there are people who make large amounts of money by doing good research to get ahead of the market. ... The gains to the economy may not in all cases be equal to the private gains to these traders, but at least they are providing some service.

By contrast, the front-running high speed trader, like the inside trader, is providing no information to the market. They are causing the price of stocks to adjust milliseconds more quickly than would otherwise be the case. It is implausible that this can provide any benefit to the economy. This is simply siphoning off money at the expense of other actors in the market.

The problem I have with Baker's argument is that I do not think it is robust.  It starts by suggesting a link between insider trading and HFT.  I don't think this holds up.  When a trade is placed on an exchange, it becomes public information.  The HFTs are making their profits by responding more quickly to the information, not because they are working on private information.  Baker distinguishes one sort of  'research', traditional economic research, from another, novel research on computer networks and algorithms, and implies that traditional research has a legitimacy in market exchange that computer research does not.

Statements like "simply siphoning off money at the expense of other actors in the market" make me a bit uneasy because they create distinctions between 'legitimate' and 'illegitimate' activity without offering a clear basis for the distinction.  For me, the distinction Baker makes seems to be on the intellectual basis of the agents: in economics or computer sciences.  I worry that the foundation of Baker's criticism is an affinity with institutional investors and a distaste for small scale entrepreneurs.

Baker's solution of  "A modest tax on financial transactions [that] would make this sort of rapid trading unprofitable" is, if my basic economic understanding is correct, a standard way incumbents create barriers to new entrants.  Wall Street, according to Jonathan Levy's Freaks of Fortune, has at least a hundred year tradition of lobbying legislatures to protect its interests and I think we should be wary of whether Wall Street's interests are aligned to the broader public.

The problem is somewhat more serious in the UK.  In 2012 the UK's Government Office of Science reviewed Computer Based Trading technologies and decided that, while acknowledging that order stuffing was dubious, they would not suggest inhibiting it.  The rational was that the market place was a competitive arena and that traders would congregate at exchanges that enabled competition; i.e. for the UK to retain its position as a financial centre the UK government should not legislate on the issue.

The substantive question is whether I can come up with a more robust argument than Baker's, and I offer an argument at the bottom of this piece.

I have been critical of the Foresight report.  However I have also been concious that I could not coherently justify my objections to practices such as order stuffing.  This concern was related to my uneasiness around identifying the concept of reciprocity being embedded in contemporary financial mathematics.  I have come from a fairly orthodox background and connecting mathematics and ethics was a problem for me since I first identified a link around 2010.

For me, the intellectual resolution of the problem of linking mathematics and ethics comes from pragmatic philosophy.  Pragmatism is especially relevant to finance because it addresses the thorny issue of truth when we cannot rely on objectivity, neutrality and determinism and because it acknowledges the role of ethics in science. Specifically, by rejecting the ideology of the fact/value dichotomy, I claim that  the principle of ‘no arbitrage’ in pricing contingent claims is infused with the moral concept of fairness.  This is all well and good, but the claim can be treated as a heuristic (as the Dutch Book argument is) or as a fact.  Based on the empirical evidence of the Ultimatum Game, I claim it is a fact that reciprocity is embedded in financial mathematics.  This raises the question of why is reciprocity important.

As well as justifying the connection between ethics and mathematics,pragmatism provides an explanatory hypothesis.  one problem I grappled with was why did the link between reciprocity and finance become obscured between the eighteenth and twenty-first centuries.  The explanation comes in the theories developed in Adorno and Horkenheimer's Dialectic of Enlightenment  or Polyani's The Great Transformation, both published in 1944. The Dialectic claims that the Enlightenment led to the objectification of nature and its mathematisation, which in turn leads to ‘instrumental mindsets’ that seek to optimally achieve predetermined ends in the context of an underlying need to control external events. Jurgen Habermas responded to the Dialectic in  Structural Transformation of the Public Sphere where he argues that during the seventeenth and eighteenth centuries public spaces emerged, the public sphere, which facilitated rational discussion that sought the truth in support of the public good. In the nineteenth century mass circulation mechanisms came to dominate the public sphere and these were controlled by private interests. As a consequence, the public became consumers of news and information rather than creators of a consensus through engagement with information. Having undertaken this analysis of the contemporary state of affairs, Habermas sought to describe how the ideal of the Enlightenment public sphere could be enacted in the more complex contemporary (pre-internet) society and his Theory of Communicative Action was the result.

Central to Communicative Action is a rejection of the dominant philosophical paradigm, the ‘philosophy of consciousness’ that is rooted in Cartesian dualism; the separation of mind-body, subject-object, concepts and is characterised by Foundationalism; philosophy is required in order to demonstrate the validity of science and the validity of science is based on empiricism, and certain views specific to the social sciences; such as that society is based on individuals (atoms) interacting, so that society is posterior to individuals and that society (a material, extending the physical metaphor) can be studied as a unitary whole, not as an aggregate of individuals.

The dominant paradigm sees language as being made up of statements that are either true or false and complex statements are valid if they can be deduced from true primitive statements. This approach is exemplified in the standard mathematical technique of axiom-theorem-proof. Habermas replaces this paradigm with one that rests on a Pragmatic theory of meaning that shifts the focus from what language says (bears truth) to what it does. Specifically, Habermas sees the function of language as being to enable different people to come to a shared understanding and achieve a consensus, this is defined as discourse. Because discourse is based on making a claim, the claim being challenged and then justified, discourse needs to be governed by rules, or norms. The most basic rules are logical and semantic, on top of these are norms governing procedure, such as sincerity and accountability, and finally there are norms to ensure that discourse is not subject to coercion or skewed by inequality.

I have come to the conclusion that markets are centres of communicative action enabled by the language of mathematics.  In this framework reciprocity is a norm of communication, but it is not the only norm.  Habermas emphasises the importance of sincerity in communication in general, and the implication is that it is required in markets.

It is on this basis that I believe we can identify order stuffing as illegitimate: it is insincere.  The difference between optimal order execution strategies, which earn their computer scientist experts money, and order stuffing is that a HFT order stuffing is not "sincere" in issuing an order they immediately cancel.  The antidote is not to impose an additional cost on transactions, that would not affect institutional investors but might hinder legitimate speculation and innovation, but to regulate the timing of order cancellations: order stuffing would not be possible if orders had to remain on the book for a few minutes.

Why do we take physicists seriously?

My undergraduate degree was in physics, at Imperial College which is/was the centre of logical positivist applied physics: when students went to Oxford to do a PhD in physics we thought they were "dropping out".  Today most of my non local academic interactions are with sociologists and theologians, the younger me would think I had dropped out, fallen through the floor and turned into a homeless drunk ranting incoherently and beyond help.  Things change.

I have recently had a couple of lunches with Paolo Quattrone, a finance professor, and Michael Northcott, a theologian.  The focus of our conversations have been around representing value (values).  My involvement is centred on my interest in the nature of mathematics.  Specifically, is financial mathematics a "truth-bearer" or is it a mechanism of discourse.  The dominant philosophical paradigm sees language as being made up of statements that are either true or false and complex statements are valid if they can be deduced from true primitive statements. This approach is exemplified in the standard mathematical technique of axiom-theorem-proof. Habermas, in the Theory of Communicative Action,  replaces this paradigm with one that rests on a Pragmatic theory of meaning that shifts the focus from what language says (true or false) to what it does. Specifically, Habermas sees the function of language as being to enable different people to come to a shared understanding and achieve a consensus, this is defined as discourse. Because discourse is based on making a claim, the claim being challenged and then justified, discourse needs to be governed by rules, or norms. The most basic rules are logical and semantic, on top of these are norms governing procedure, such as sincerity and accountability, and finally there are norms to ensure that discourse is not subject to coercion or skewed by inequality.  I have come to believe that reciprocity is important in financial mathematics because it is a norm that enables market discourse which seeks the truth (consensus) on value rather than it determining what is true.

Paolo is interested in how company accounts are used.  My understanding of his position is that contemporary accounts are presented as a representation of truth, but their genesis was as focuses of reflection: you accounted for your actions. This was exemplified when I recently started reading Neal Stephenson's Baroque Cycle (a trilogy I strongly recommend - it covers some of the same themes as this blog but with more pirates and sex, what more could you want?) where Stephenson describes Isaac Newton writing down, accounting for, his sins one night.  When I first read this section it passed me by, but Paolo has enlightened me as to the depth of Stephenson's story.

When we were having lunch, Paolo and Michael were discussing the fact that while today accounts are "annual" the original accounts were an "open book", they never "closed" the account.  Michael is interested in this because it represents a theological conception of time that impacts on ethics.  Specifically, modern business practice, built on science, rests on the distinction between now and then, here and there, a distinction that does not exist for believers in a transcendental deity.

I was immediately interested in Michael's position, which motivates his interest in environmental issues, because it is very different from mine.  The topic that most interested me at school was entropy and how we know time moves forward: because things become disordered.  As a teenager I justified my messy bedroom to my mother as a consequence of the indubitable laws of physics.  Interest is charged because the lender is uncertain if the borrower will repay in the future: time exists in finance because there is uncertainty. Believers in a transcendental deity see uncertainty as a subjective problem, the deity does not experience it.  I think this could explain why mathematical probability was developed by Augustinians (Calvinists/Jansenists) such as: Pascal, Huygens, Bernoulli, Montmort, de Moivre and Bayes; and not by Anglicans (Newton) or Lutherans (Leibnitz).  Augustinians believed that, like time and space, there was/is an absolute measure of chance.

While modern physics accommodates uncertainty it does so in a statistical context.  for example, Poincaré's recurrence theorem theorem states that any bounded system (i.e. a bounded universe) will eventually return to its original state, and because the laws of physics are deterministic, it will repeat its evolution: while a gas looks random, it can be considered a (statistically) deterministic system.  A simple solution to this paradox is if we introduce 'radical uncertainty' and consider the universe as a non-ergodic system.  The fact that no one thinks this is the obvious solution probably indicates it will open a much nastier can of worms for physics.

Noah Smith has argued that 

Physics intuition is all about symmetry, and about finding elegant (i.e. easy) ways to solve tough-seeming systems. In econ, that rarely matters at all; the intuition is all about imagining human behavior.

This is all true and also explains why physics intuition is often unhelpful in an economic setting.  When physicists talk about symmetry they are talking about something being invariant under transformation, i.e. there is something unchanging in nature that can be fixed upon and there is something being conserved (Noether's Theorem).  The issues I have with economics adopting physicists intuition will evaporate when someone can identify, and justify, what it is in economics that is invariant: what quantity is being conserved.  The reason why economists focus on human nature is because human nature is inconstant.

Time is important in theology, finance and physics. I don't understand, or even know, the details of what the current consensus on time in physics is, but my intuition is that time in physics does not generally have a direction, and while there is a thermodynamic arrow of time (entropy; modulo recurrence) at the quantum level, dominated by uncertainty, time is symmetric.

Where I have a real problem with physics is in the area of multiverses, particularly the many-worlds interpretation of quantum mechanics.  As far as I can tell, the many worlds interpretation exists because physicists don't like the idea that when a wave function collapses it collapses simultaneously across the universe, information is transmitted at a speed faster than that of light.  We mock medeival scholastics for having (apparently) argued about how many angels could dance on the head of a pin: yet we take physicists and their multiworlds, employed to address a technical issue internal to physics, seriously.  My issue is that they appear to resolve their problem, of having to deal with a probability distribution, by replacing a difficult issue related to time and radical uncertainty with an "ensemble" interpretation.  My frustration with Ole Peters is because physicists believes in the ensemble approach to uncertainty (that there exist an infinite collection of paths and the universe is on one of these paths) and then suddenly realise it is a bit meaningless in economics.

In the aftermath of the discovery of evidence for gravitational waves the theologian Giles Fraser has argued that science is becoming like religion: it argues that asking what came before the Big Bang is a non-question, just as monotheists argue the question who created God is a non-question.  A response from the physicist Jon Butterworth is that physicists deal with the nature of the universe while theologians address the meaning: a fact/value dichotomy.  While Butterworth acknowledges that there is an interplay between fact and value, I actually think the interplay is far more important than Butterwoth implies.  My case in point, time, clearly demonstrates this.  The problem Michael, theoretical physicists and I have with time is that, for me at least, there is no clear demarcation between the nature and meaning of time.  In fact the nature and meaning of time could well be ambiguous, even within physics, and scientific integrity demands we take this possibility seriously.