Speculator Column IR Magazine, November 2012
A measure of madness in modern systems
Finance has units and premises that make even astrology appear ultra-scientific
We sometimes find, on further investigation, that what we thought was solidly based science is based on foundations of jello. Take the metric system used in all our physics, chemistry, biology and cosmology: it was based on a false premise – that the earth is spherical and fixed in its dimensions.
Back in the day, methodical French scientists measured the distance from the pole to the equator, based on the angles of the sun at midday, and divided it by 10 million. Et voila, messieurs! Le mètre!
In fact, the earth is not spherical and it changes shape and size over the seasons; but this misconception is the basis of the whole system, along with the seconds and minutes derived from equally spurious certainty about the regularity of the calendar.
Similarly, most of the world’s railways use a gauge measuring four feet eight and a half inches, allegedly based on five Roman feet; it’s the width of the gates in Hadrian’s Wall in the UK and thus of the standard wagon in the north east of England, where George Stephenson built the first rail lines.
A foot is of course the length of that flat bit at the end of the leg. So now Chinese high-speed trains whoosh along at hundreds of kilo-meters an hour on tracks built to accommodate a Roman chariot, using units originally pegged to a legionnaire’s boot size.
In finance, however, we have units and premises that make the cubit, the scruple and even astrology appear ultra-scientific. Governments, banks and chief executives prognosticate on, for example, the business cycle – compared with which the spherical nature of the earth is as regular as a ball bearing.
Think of the natural rate of interest, currently being ignored by central banks across the world. Think of the ‘natural rate of unemployment’, altered according to year and geography. Or think of the good old efficient market theory, blown up more often than a Nevada nuclear test site.
This brings me to my developing tableware stationery theory of everything. Much of our computer hardware is apparently based upon the five and a quarter inch floppy disk, itself the brainchild of a crack design team in a bar using a folded paper napkin to illustrate its desired drive dimensions.
And it was on yet another table napkin that Arthur Laffer drew the famous curve that confirmed the already strong opinion of Dick Cheney and Donald Rumsfeld that tax increases were a bad thing.
Those Roman legionnaires used to socialize in communal latrines and shoot the breeze. Imagine if their habit had persisted, along with the non-metric foot, into the modern age – would such discussions have led to computer drives modeled on a roll of toilet tissue?
Would the Laffer Curve achieve its apotheosis as a Möbius strip with no beginning and no end so that instead of taxing businesses, governments just kept giving them money? Or is that what actually happened?
But the Romans used sponges, not tissue, so our economic theories could have ended up pretty much as they are now: formless, soggy and messy, although infinitely recyclable, just like most of our financial nostrums. After all, no one ever discarded a good theory just because it failed.