We believe that it is almost a universal belief that the Day After the pandemic our societies will be operating under new norms. The rising debts follow a parallel path with the rising geopolitical rivalry. The declining educational standards also seem to follow a parallel path with the declining norms of democratic rule around the world. The rise of alternative means of payment and of crypto and digital currencies seem also to follow a path that coincides with the rising role of the state.
It seems that the classicism established by the likes of Adam Smith and David Ricardo has now been evolving into a peculiar, unorthodox regime where Post-Keynesianism (Kalecki, Kaldor, Davidson, others) finds some common ground with the libertarianism of the Austrian School of thought (especially on the idea of endogenous money and the historical time framework of action characterized by uncertainty/unknowledge and some irreversibility).
No doubt, the fundamental principles of the founders and immediate successors of those two respective schools of thought (Keynes and Tobin among others on one side, and Menger, Hayek, von Mises on the other) could not be more different.
The table below represents some of the most important developments in economic thought since the 16th century, along with those (among others) who pioneered that evolution:
Now, when we look at the major milestones accomplished in Physics in the last 100+ years, we observe a parallel phenomenon: Einstein’s general relativity theory is incompatible with quantum mechanics. They simply cannot be both right. Einstein’s general relativity theory helps us understand the universe and the expansions of the heavens in terms of stars, galaxies, clusters of galaxies, etc. The basic force is gravity, understood as the effect of a curved spacetime. On the other hand, quantum mechanics helps us understand the fundamental structure of the matter by analyzing molecules, atoms, and subatomic particles like electrons and quarks. There are several basic forces here: electromagnetism, the strong interaction, and the weak interaction, the latter two operating on the atomic scale.
The table below represents some of the most important milestones in the evolution of Physics since the 16th century:
However, the fact is that, in the central depth of a blackhole, a huge mass could be crushed to a miniscule size. Could it be then that one theory needs the other? Is the marriage between the two inevitable? Could it be that such a marriage is officiated by superstring theory?
Einstein’s explanation of the photoelectric effect (for which he won the Nobel prize) showed that light acted in this situation as particles, what we now call photons. Since Maxwell showed that light was actually waves, the contradiction launched the wave-particle duality of quantum mechanics. Waves can combine freely—think of water waves passing through each other—but particles cannot. This caused standard quantum theory to assign to particles probabilities. Einstein, a realist philosophically, disagreed steadfastly, and he wasn’t alone. Schrodinger and deBroglie, early giants in quantum theory, agreed with him. They didn’t think that quantum mechanics was wrong as much as it was incomplete. Einstein worked on the Unified Field Theory, his expression of the marriage, in order to fill in the gaps in quantum theory. He didn’t succeed.
Are we observers of marriages in both economics and physics that, a few years ago, would be considered unthinkable? Does the evolution of the two disciplines have other similar examples of parallel movements?
Newtonian mechanics stood on the shoulders of great individuals like Galileo and Descartes. Galileo’s and Descartes’s pursuit of reflecting nature in a form of mathematical language found its fulfillment in Newton’s grand design of planetary and terrestrial motion. Newton’s mechanics replaced the Greek teleological cause and demonstrated that bodies move of their accord at constant speed. Newtonian mechanics apply equally well to falling apples and revolving moons. According to Newtonian mechanics, the laws of nature are postulated to explain the motion of all material bodies, and the power of mathematics is there to prove that. If the planets existed in empty space, then they would have been obeying the law of inertia. However, the planets are inside a solar system and thus feel the effect of a massive sun that tugs on them with Newton’s postulated force of gravity and bends their straight-line trajectories into elliptical orbits. The whole cosmos – in Newtonian laws – operates like a machine — like a clock.
Welcome now to the world of Adam Smith. Smith took, from Newton, the mechanistic view of the world and envisioned the economy as a machine. The fundamental unit is the individual, and the force that moves the individual is self-interest, or what Smith called “the constant and uninterrupted effort of every man to better his own condition.” Self-interest is the force of gravity that brings together the diverse preferences of all market players. The result was a system which brings equilibrium in price and quantity.
Newtonian constants, or what John Barrow calls the mysterious and unshakable constants in the fabric of the universe, found their reflection on the assumptions of some classical, neoclassical, or new classical economic models such as velocity of money or full capacity equilibrium. Moreover, the stable relationships and cosmological constants found their reflection in mechanistic Keynesian models where a menu of choices was presented to policy makers in order to choose between inflation and unemployment, as well as in experimenting with social and economic engineering.
Needless, of course, to say, the determinism of a mechanistic world was adopted by utopian socialists and Marxists in designing economic systems that predicted with amazing inaccuracy the collapse of capitalism. Such failure, someone might say, defies even Heisenberg’s Principle of Uncertainty! The schools of thought that surround Marxism and socialism may have aspired to bring to economics the revolution that Maxwell’s 19th century brilliant theory of electromagnetism brought to the wave theory of light. The problem, of course, is that empiricism proved that those theories were based on wrong assumptions and ultimately collapsed like Galileo’s system collapsed with the special relativity theory of Einstein.
The relativity of time and space may be different for different observers, but those differences are neither random nor arbitrary. They follow a pattern that reveals order and invariance which underlines those differences. Space and time measurements may vary individually among different reference frames, but the differences can be calculated precisely. Yet the speed of light is the same for you and me despite relative motion; it is invariant. The revolution of time-space ideas brought to physics a new dimension of Momentum, and to economics the Keynesian multiplier.
Einstein’s effort to reformulate the laws of motion of material bodies (and thus forever revising Newtonian mechanics) resulted in something unexpected: The mass and the energy of a body were no longer independent quantities, but rather each one could be converted into the other: matter into energy and energy into matter. Welcome to the world of Keynesianism (original, New Keynesians, Post Keynesians, etc.). The synergy of the State and the private sector is the ingredient that could save capitalism from entropy and the second law of thermodynamics. Government spending is converted into private profits which, in turn, are invested and spent, hence sustaining employment and incomes.
Einstein’s special theory of relativity usually deals only with reference to motion at constant speeds and doesn’t account for the force of gravity easily. Einstein replaced the gravitational forces that held the cosmos together by a curved spacetime. The earth and the planets are kept in their orbits by the sun’s distortion of spacetime, and the Milky Way and nearby galaxies are held together in a galactic group by their mutual spacetime distortions. Moreover, the thought experiments of Einstein led him to what is known as the principle of equivalence, where he connected gravity and acceleration and concluded that in a gravitational field all bodies fall at the same rate, which, in turn, became the foundation for his general theory of relativity. Welcome to the world of Robert Lucas (New Classicals) and the Ricardian Equivalence Theorem where government spending has no multiplier effects because rational individuals save more in order to pay higher taxes in the future.
While Einstein helped us understand the expanding universe and the cosmos, it was not until the pioneers of quantum theory came along that helped us understand the large-scale behavior of matter through a complete quantitative description of the atomic system and the molecular phenomena. The cosmos, according to the quantum theory, needs explanation through an understanding of the microcosmos of the atom. Welcome to the quest of micro-foundations in macroeconomics.
But then again, can we know with precision what the outcome will be? The more you know about the positions of an electron the less you would know about its speed. There is no chance in the world we could know with precision an electron’s path. Position and speed/motion counterbalance one another, or to rephrase the Phillips curve, higher inflation counterbalances a declining unemployment. If you try to lower unemployment below its natural level, stagflation may occur, as Friedman taught us. We might not know the exact tradeoff between inflation and unemployment, but they may need each other, or to rephrase it, if you could measure the position perfectly, you would learn nothing about the speed. Thinking in supply-side economic terms, if you impose a tax rate of 100%, you will collect nothing in income taxes since no one will work! It seems that John F. Kennedy’s advisors had read about Heisenberg’s uncertainty principle before they started cutting taxes in the 1960s.
In both disciplines, the challenges include the fact that that it there is a basic human tendency, referred to in psychology generally and behavior economics specifically, as a cognitive bias called confirmation bias, or consequential bias; that is, to see patterns or reach conclusions consistent with our world view. This is particularly important in macro-economics, where there are complex emergent systems which are delicately balanced but difficult to accurately measure, and where the unknown and unintended results are often more robust (by which we mean larger in size and scope), and more important (by which we mean having greater long-term effect) than the reasons justifying the change in economic planning. We are, perhaps, seeing this with “helicopter money” being used to address the pandemic—for example. As we are recovering from the pandemic, we saw last Friday disappointing jobs numbers, where the different interpretations offered may be viewed as part of one’s own perspective on the role of government and concomitant social obligations.
Niels Bohr was debating with his generation of physicists the paradoxes of quantum theory. The apparent conflict between the wave picture and the particle picture of the electron, or between position and speed in the uncertainty principle, implied to him that there might be a deep principle of complementarity. His interpretation is known today as the Copenhagen interpretation of quantum theory. Einstein struggled to find deficiencies and flaws in the basic structure of quantum mechanics. The Bohr-Einstein debates are as famous as the struggles between Hayek and Keynes and their followers, especially with respect to the role of the state in the affairs of the economy.
The financial crisis that started in 2007 and the Covid-19 crisis that started in early 2020 found governments that were leaning conservatively (George W. Bush and Donald Trump) applied Keynesian solutions of massive government spending, which were continued by their successors (Barack Obama and Joe Biden). Niels Bohr’s complementarity extended Einstein’s concept that space and time are experienced relative to one’s state of motion. Moreover, Einstein’s concept that space and time can warp and curve in response to the presence of matter or energy (general theory of relativity), brings to mind the uncertainty of a universe that has multiple dimensions which are rightly curled into the folded fabric of the cosmos (superstring theory), where complementarity is the governing principle.
In game theory, the main objective is to consider decision making not as a reaction to exogenous events (“dead variables”) but, rather, as strategic planning to other agents’ actions (“live variables”). Strategy formulation involves pure/particular moves or mixed/random plays. Non-cooperative, as well as coalition games, can be reduced to some form of a non-cooperative form. The best response of any player is in accordance with one another, and this is how an equilibrium could be achieved. However, if the players are able to formulate a game of cooperative bargaining, then the optimal solution that satisfies symmetry, efficiency, and independence of irrelevant alternatives will seek a mix that is characterized by abundance so that both players get the satisfaction they want, given that the total request is greater than the amount needed. Welcome to Nash Bargaining Solution (NBS) or Bidenomics, where the Austrians and Post-Keynesians share their views on time and money, and in a superstring version of a new political economy, they both emphasize the historical time framework of action characterized by unknowledge, irreversibility, and abundant liquidity.
A few years ago, as Dale and I were walking down the streets of Beijing we saw some kids kicking a can. We started debating if that resembled scenes from the Divine Comedy or scenes from a forthcoming Divine Conspiracy. In the end, we agreed that the kids were simply practicing politics as scientific economics.
From Adam Smith and Isaac Newton to Helicopter Money and Superstrings: Crises, Niels Bohr, and the Nash Bargaining Solution
Author : John E. Charalambakis
Date : May 10, 2021
We believe that it is almost a universal belief that the Day After the pandemic our societies will be operating under new norms. The rising debts follow a parallel path with the rising geopolitical rivalry. The declining educational standards also seem to follow a parallel path with the declining norms of democratic rule around the world. The rise of alternative means of payment and of crypto and digital currencies seem also to follow a path that coincides with the rising role of the state.
It seems that the classicism established by the likes of Adam Smith and David Ricardo has now been evolving into a peculiar, unorthodox regime where Post-Keynesianism (Kalecki, Kaldor, Davidson, others) finds some common ground with the libertarianism of the Austrian School of thought (especially on the idea of endogenous money and the historical time framework of action characterized by uncertainty/unknowledge and some irreversibility).
No doubt, the fundamental principles of the founders and immediate successors of those two respective schools of thought (Keynes and Tobin among others on one side, and Menger, Hayek, von Mises on the other) could not be more different.
The table below represents some of the most important developments in economic thought since the 16th century, along with those (among others) who pioneered that evolution:
Now, when we look at the major milestones accomplished in Physics in the last 100+ years, we observe a parallel phenomenon: Einstein’s general relativity theory is incompatible with quantum mechanics. They simply cannot be both right. Einstein’s general relativity theory helps us understand the universe and the expansions of the heavens in terms of stars, galaxies, clusters of galaxies, etc. The basic force is gravity, understood as the effect of a curved spacetime. On the other hand, quantum mechanics helps us understand the fundamental structure of the matter by analyzing molecules, atoms, and subatomic particles like electrons and quarks. There are several basic forces here: electromagnetism, the strong interaction, and the weak interaction, the latter two operating on the atomic scale.
The table below represents some of the most important milestones in the evolution of Physics since the 16th century:
However, the fact is that, in the central depth of a blackhole, a huge mass could be crushed to a miniscule size. Could it be then that one theory needs the other? Is the marriage between the two inevitable? Could it be that such a marriage is officiated by superstring theory?
Einstein’s explanation of the photoelectric effect (for which he won the Nobel prize) showed that light acted in this situation as particles, what we now call photons. Since Maxwell showed that light was actually waves, the contradiction launched the wave-particle duality of quantum mechanics. Waves can combine freely—think of water waves passing through each other—but particles cannot. This caused standard quantum theory to assign to particles probabilities. Einstein, a realist philosophically, disagreed steadfastly, and he wasn’t alone. Schrodinger and deBroglie, early giants in quantum theory, agreed with him. They didn’t think that quantum mechanics was wrong as much as it was incomplete. Einstein worked on the Unified Field Theory, his expression of the marriage, in order to fill in the gaps in quantum theory. He didn’t succeed.
Are we observers of marriages in both economics and physics that, a few years ago, would be considered unthinkable? Does the evolution of the two disciplines have other similar examples of parallel movements?
Newtonian mechanics stood on the shoulders of great individuals like Galileo and Descartes. Galileo’s and Descartes’s pursuit of reflecting nature in a form of mathematical language found its fulfillment in Newton’s grand design of planetary and terrestrial motion. Newton’s mechanics replaced the Greek teleological cause and demonstrated that bodies move of their accord at constant speed. Newtonian mechanics apply equally well to falling apples and revolving moons. According to Newtonian mechanics, the laws of nature are postulated to explain the motion of all material bodies, and the power of mathematics is there to prove that. If the planets existed in empty space, then they would have been obeying the law of inertia. However, the planets are inside a solar system and thus feel the effect of a massive sun that tugs on them with Newton’s postulated force of gravity and bends their straight-line trajectories into elliptical orbits. The whole cosmos – in Newtonian laws – operates like a machine — like a clock.
Welcome now to the world of Adam Smith. Smith took, from Newton, the mechanistic view of the world and envisioned the economy as a machine. The fundamental unit is the individual, and the force that moves the individual is self-interest, or what Smith called “the constant and uninterrupted effort of every man to better his own condition.” Self-interest is the force of gravity that brings together the diverse preferences of all market players. The result was a system which brings equilibrium in price and quantity.
Newtonian constants, or what John Barrow calls the mysterious and unshakable constants in the fabric of the universe, found their reflection on the assumptions of some classical, neoclassical, or new classical economic models such as velocity of money or full capacity equilibrium. Moreover, the stable relationships and cosmological constants found their reflection in mechanistic Keynesian models where a menu of choices was presented to policy makers in order to choose between inflation and unemployment, as well as in experimenting with social and economic engineering.
Needless, of course, to say, the determinism of a mechanistic world was adopted by utopian socialists and Marxists in designing economic systems that predicted with amazing inaccuracy the collapse of capitalism. Such failure, someone might say, defies even Heisenberg’s Principle of Uncertainty! The schools of thought that surround Marxism and socialism may have aspired to bring to economics the revolution that Maxwell’s 19th century brilliant theory of electromagnetism brought to the wave theory of light. The problem, of course, is that empiricism proved that those theories were based on wrong assumptions and ultimately collapsed like Galileo’s system collapsed with the special relativity theory of Einstein.
The relativity of time and space may be different for different observers, but those differences are neither random nor arbitrary. They follow a pattern that reveals order and invariance which underlines those differences. Space and time measurements may vary individually among different reference frames, but the differences can be calculated precisely. Yet the speed of light is the same for you and me despite relative motion; it is invariant. The revolution of time-space ideas brought to physics a new dimension of Momentum, and to economics the Keynesian multiplier.
Einstein’s effort to reformulate the laws of motion of material bodies (and thus forever revising Newtonian mechanics) resulted in something unexpected: The mass and the energy of a body were no longer independent quantities, but rather each one could be converted into the other: matter into energy and energy into matter. Welcome to the world of Keynesianism (original, New Keynesians, Post Keynesians, etc.). The synergy of the State and the private sector is the ingredient that could save capitalism from entropy and the second law of thermodynamics. Government spending is converted into private profits which, in turn, are invested and spent, hence sustaining employment and incomes.
Einstein’s special theory of relativity usually deals only with reference to motion at constant speeds and doesn’t account for the force of gravity easily. Einstein replaced the gravitational forces that held the cosmos together by a curved spacetime. The earth and the planets are kept in their orbits by the sun’s distortion of spacetime, and the Milky Way and nearby galaxies are held together in a galactic group by their mutual spacetime distortions. Moreover, the thought experiments of Einstein led him to what is known as the principle of equivalence, where he connected gravity and acceleration and concluded that in a gravitational field all bodies fall at the same rate, which, in turn, became the foundation for his general theory of relativity. Welcome to the world of Robert Lucas (New Classicals) and the Ricardian Equivalence Theorem where government spending has no multiplier effects because rational individuals save more in order to pay higher taxes in the future.
While Einstein helped us understand the expanding universe and the cosmos, it was not until the pioneers of quantum theory came along that helped us understand the large-scale behavior of matter through a complete quantitative description of the atomic system and the molecular phenomena. The cosmos, according to the quantum theory, needs explanation through an understanding of the microcosmos of the atom. Welcome to the quest of micro-foundations in macroeconomics.
But then again, can we know with precision what the outcome will be? The more you know about the positions of an electron the less you would know about its speed. There is no chance in the world we could know with precision an electron’s path. Position and speed/motion counterbalance one another, or to rephrase the Phillips curve, higher inflation counterbalances a declining unemployment. If you try to lower unemployment below its natural level, stagflation may occur, as Friedman taught us. We might not know the exact tradeoff between inflation and unemployment, but they may need each other, or to rephrase it, if you could measure the position perfectly, you would learn nothing about the speed. Thinking in supply-side economic terms, if you impose a tax rate of 100%, you will collect nothing in income taxes since no one will work! It seems that John F. Kennedy’s advisors had read about Heisenberg’s uncertainty principle before they started cutting taxes in the 1960s.
In both disciplines, the challenges include the fact that that it there is a basic human tendency, referred to in psychology generally and behavior economics specifically, as a cognitive bias called confirmation bias, or consequential bias; that is, to see patterns or reach conclusions consistent with our world view. This is particularly important in macro-economics, where there are complex emergent systems which are delicately balanced but difficult to accurately measure, and where the unknown and unintended results are often more robust (by which we mean larger in size and scope), and more important (by which we mean having greater long-term effect) than the reasons justifying the change in economic planning. We are, perhaps, seeing this with “helicopter money” being used to address the pandemic—for example. As we are recovering from the pandemic, we saw last Friday disappointing jobs numbers, where the different interpretations offered may be viewed as part of one’s own perspective on the role of government and concomitant social obligations.
Niels Bohr was debating with his generation of physicists the paradoxes of quantum theory. The apparent conflict between the wave picture and the particle picture of the electron, or between position and speed in the uncertainty principle, implied to him that there might be a deep principle of complementarity. His interpretation is known today as the Copenhagen interpretation of quantum theory. Einstein struggled to find deficiencies and flaws in the basic structure of quantum mechanics. The Bohr-Einstein debates are as famous as the struggles between Hayek and Keynes and their followers, especially with respect to the role of the state in the affairs of the economy.
The financial crisis that started in 2007 and the Covid-19 crisis that started in early 2020 found governments that were leaning conservatively (George W. Bush and Donald Trump) applied Keynesian solutions of massive government spending, which were continued by their successors (Barack Obama and Joe Biden). Niels Bohr’s complementarity extended Einstein’s concept that space and time are experienced relative to one’s state of motion. Moreover, Einstein’s concept that space and time can warp and curve in response to the presence of matter or energy (general theory of relativity), brings to mind the uncertainty of a universe that has multiple dimensions which are rightly curled into the folded fabric of the cosmos (superstring theory), where complementarity is the governing principle.
In game theory, the main objective is to consider decision making not as a reaction to exogenous events (“dead variables”) but, rather, as strategic planning to other agents’ actions (“live variables”). Strategy formulation involves pure/particular moves or mixed/random plays. Non-cooperative, as well as coalition games, can be reduced to some form of a non-cooperative form. The best response of any player is in accordance with one another, and this is how an equilibrium could be achieved. However, if the players are able to formulate a game of cooperative bargaining, then the optimal solution that satisfies symmetry, efficiency, and independence of irrelevant alternatives will seek a mix that is characterized by abundance so that both players get the satisfaction they want, given that the total request is greater than the amount needed. Welcome to Nash Bargaining Solution (NBS) or Bidenomics, where the Austrians and Post-Keynesians share their views on time and money, and in a superstring version of a new political economy, they both emphasize the historical time framework of action characterized by unknowledge, irreversibility, and abundant liquidity.
A few years ago, as Dale and I were walking down the streets of Beijing we saw some kids kicking a can. We started debating if that resembled scenes from the Divine Comedy or scenes from a forthcoming Divine Conspiracy. In the end, we agreed that the kids were simply practicing politics as scientific economics.