Hows Does Physics See the Financial Crash and What Does That Mean for Us?

Einstein in 1947: he had bigger things on his mind than banks and worker morale and engagement, but we can learn much from physics about current social challenges brought to us by the recent Crash.  (Photo source:  Wikipedia)

For some reason which many years of training and experience in psychology have failed to explain to me, my two beloved sisters each married genius level scientists.  It wasn’t that Dad was one, although he had a good government job and a side job as a spy catcher.  That was why I was never allowed to visit him at his office in London, and why, when I asked him what he had done that day at work he simply said “cloak and dagger”….but I digress.  Having two genius level scientists as brothers-in-law means that you don’t try to compete, you just find a way to take advantage of this built-in expertise whenever you can.

So occasionally there are huge benefits, and I just experienced one.  When you write business books, like I do, you can use one of those men as a source, you can leverage that insight which they have; and that’s what I did for the new book I just released (co-authored with my dear friend Cary Cooper).  I talked to John Enderby about how physics sees the financial system, which turned out to be a valuable thing to do, as it made crystal clear some issues like:

–how much can we regulate before we kill the goose that lays the golden eggs?

–are Crashes like what we have been through in 2008 inevitable?

Who would have thought that physics could give us answers to that, but it can…  Remember that physicists already work in many financial services companies:  no, not in your garden variety banks which just take deposits and then lend that money out for mortgages.  I am talking about the investment banks, crafty devils as they are, who take your deposits then work financial alchemy on them to turn them into vast profits (in good times) or almost bring down the world as we know it (in bad times).

John Enderby gave me some terrific insights; but first let me give you a brief bio.  He was for a long time a Professor at Bristol University’s physics department, then later became the top physicist at Britain’s famed Royal Society, the so-called “physical secretary”. Now the RS is the place that when you sign the book of membership, you can look back earlier in that same book and see names like Isaac Newton and so on.  You’re in good company.  John was then knighted, so I tease him when I see him by pretending to kiss his ring (which he doesn’t have), or by asking him if he likes being ranked up with Mick Jagger, etc.  By the way, I got the ring kissing moves from Amadeus, when Mozart and everyone else had to make them with the Archbishop of Salzburg and the Emperor of Austria….

So I asked John how physics sees the financial system.  He simply said, its non linear, or chaotic.  As he pointed out, a bank in Italy or Spain can fail and the whole set of unpredictable consequences flows from that, many of them not at all good.  So what is to be done, I asked?  Well the answer lies in physics experiments when a chaotic system needs to be controlled, and you use “damping”…..in my terms that means you gradually turn the screws on the beast until it starts to yield.  But how far to go?  Well, as John pointed out, damping lessens the chaos and unpredictability of the system on which you are using it, but at a cost.  The cost is that, eventually, you stop the “growth”.  That’s right, you kill damn thing.  So what’s to be done?  Well, you “damp” it until you have a level of growth you can live with, so that you benefit from its effects in some way, then you sit back and resign yourself to the fact that you will always be exposed to its unpredictability.

As John told me, “we will always have “boom/bust” in the financial system unless we kill it off entirely”.  Since that is not an option, we had better get used to it.  We had also better be mindful that this capitalist system in which we live has given us an awful lot of the “growth” which John Enderby talked about, and we had better be careful not to “damp” it down into oblivion.  More boom/bust is on the way, folks…unless you long for a socialist paradise, in which case, go to the library and dust off an old copy of Animal Farm and 1984, to remind yourself of how far damping of the animal spirits of our capitalist system can go….and what the consequences of that can be.

This is the system we have, and as the new book says, lets not throw it away, lets improve it.  That is the challenge, even if we have to sail through choppy seas now and then as we face the inevitable boom/bust cycles.  The consequences for my chosen field of morale and engagement are significant.  More of that to come on these pages….

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