In a fascinating article in The New Atlantis, Paul J. Cella III argues the current global financial crisis is a result, at least in part, of a misunderstanding of what it means to be human. He argues that certain biases in the modern mind – in particular our love of abstraction and our extreme confidence in technology – led to an economic system disconnected from reality and vulnerable to collapse.
Regarding the current crisis, he writes:
Partly this is a tale of the failure of a particular system of debt finance. More deeply, it is a narrative of the failure of the modern mind, for much of the reckless grandiosity of modern technological civilization is evident in the peculiar features of the finance crisis. In that sense we might say that shadow banking is a synecdoche for modern technological hubris.
His argument is quite technical, but in short he asserts that the economy of the past few decades has been fueled by a flow of credit based on “mathematical abstractions and possibility models” made possible by advanced computing (shadow banking), which very few people fully understood and yet which we have put incredible confidence in. Our love of abstractions (simplifications that take us away from the messy reality of, well, reality) made the complexity of the economic system seem a virtue, not a caution:
At the very heart of the crisis and the subsequent bailouts is the elegant excellence of the engineered abstraction, produced by mathematical brilliance and computing capacity. All the messy variations of human activity in the area of real-estate finance could, seemingly, be brought under the reliable authority of graceful formulas. Every wager could be safely hedged, once the appropriate calculations were run
We falsely imagined that “ideas are more real than men” and we are paying the cost.
It is foolish in the extreme to ever imagine that any mathematical formula, no matter how subtle, can properly capture the mystery that is man. This is the simple wisdom that modern finance forgot. Our mental imaginings and computations, no matter how precise, are but approximations of the real world as it is. Our perception, even aided by machines and computers, is strictly limited. Our technical capacity is considerable, but there is still much that is beyond us.
Wall Street, at the very pinnacle of financial engineering, came to believe that derivatives on statistical abstractions were more real than men — and certainly more real than their houses. The financiers supposed that the economics of man can be perfectly figured by formula, by imitating the computation and abstraction of hard science.
The whole article is well worth a read. How we think about the world matters. What Cella is at pains to point out is that even somehthing as basic to our lives as the economy is based on an answer to the question what does it mean to be human. If we get the answer wrong, there are profound consequences.
To read Cella’s full article, The Financial Crisis and the Scientific Mindset, click here.