Chapter 7 Chapter 4 Do you really believe this set?

The particles of economics are smart, while the particles of physics are dumb. The elementary particle of physics has no past, no experience, no purpose, no hope or fear of the future, it just exists.In economics, our particles have insight, and our particles must act on the basis of expectations and strategies. Under normal circumstances, Arthur is not nervous when speaking.However, the Santa Fe Institute's economic conference is not the usual situation.Before arriving in Santa Fe, he had a premonition that something big was going to happen.When Airl stopped me, when I started hearing big names like Rhett, Anderson, Gehrman, etc. were behind the scenes, when Dean Cowan called me, it was clear that people in Santa Fe saw this meeting as a important milestone.

According to Arrow and Anderson's plan, the meeting would last ten days.It was a long session by academic standards.Ke Wen arranged a press conference on the last day of the meeting, and Rhett will be there in person.Anderson's presence is a testament to this, because seven months ago, in February 1987, every condensed matter physicist in the world jumped up at the discovery of a scruffy ceramic The new material is highly conductive in liquid nitrogen that reaches its boiling point (minus 321 degrees Fahrenheit) and encounters little resistance.Anderson, like many other theoretical physicists, is eager to understand why these high-temperature superconductors behave the way they do.

Meeting of the Wind and Cloud But for Arthur, the real eye-opener came when he arrived at the Santa Fe Institute two weeks earlier, in late August, and saw the attendance list for himself. He had known Airl and Anderson for a long time, and he also knew his Stanford colleague Tom Sargent. Sargent is famous for analyzing how the rational decision-making of private enterprises interacts with the economic environment shaped by the government. He has been rumored repeatedly that he may compete for the Nobel Prize. .Other celebrities who will be present include: Hollis Chenery, an honorary professor at Harvard who once served as the head of the research department of the World Bank; Larry Summers, a famous economic consultant and a top student at Harvard, who first applied chaos theory to economics Jose Sheinkman, a professor at the University of Chicago, and David Ruelle, a Belgian physicist who was one of the founders of chaos theory.

Arthur was amazed. There were about twenty people on the list, all of whom were chosen at the moment.He felt the adrenaline starting to rise.I knew this was a pivotal moment for me, an opportunity to explain the idea of ​​increasing returns to this group of people I was hoping to convince.My hunch is that physicists will be receptive to my ideas, but I really don't know what they'll say, or what Arrow will say.Although the economists present were top-notch, they were known primarily for traditional theory, so I had no idea they would accept my ideas.Without any clues to follow, I don't know what the atmosphere will be like, whether there will be scenes of bombardment, or whether it will be peaceful.

So, as the opening day of the conference approached, Arthur and Kaufman spent less and less time walking and chatting, and more and more time polishing his speeches.He also spends a lot of time practicing Tai Chi.Tai Chi teaches you how to absorb the power of an attack and then immediately counterattack, he said: I think this may be what I need.The best way to stand your ground under an attack is to practice martial arts in slow motion.Because every time you throw a punch, imagine yourself saying something to the audience. Like magnetic glass? The meeting was held at nine o'clock in the converted conference hall of the monastery chapel. The participants sat around two rows of long tables, and the morning light reflected in the venue through the stained glass.After Anderson made a short opening statement outlining the topics the symposium was scheduled to explore, Arthur stood up to deliver his first serious talk: Self-reinforcing mechanisms in economics.

At the beginning of the speech, Arthur vaguely felt that Arrow was deliberately raising his spirits, as if he was worried that Arthur would give physicists a strange impression of economics.Arrow himself could not remember ever feeling this way.I know that Arthur is very expressive.He said.And for him, this meeting is an experiment, and from the perspective of the research institute, the risk is relatively high.But as far as the knowledge level is concerned, the current foundation is weak and there is nothing to lose.If the experiment fails, it fails.But worry or not, Arrow had clearly been extraordinarily pricked up his analytical nerves that morning.

Arthur begins by explaining to physicists that when he uses the words reinforcement mechanisms, he basically means nonlinearities in economics.wait a minute!Arrow said: What exactly do you mean by non-linear? Aren't all economic phenomena non-linear?Well, that's right.Arthur said that if you want to define it more precisely mathematically, the general assumption of diminishing returns does correspond to a nonlinear equation of the second order, which makes the economy tend to be stable or balanced; but what he is talking about is the third order ( The non-linearity of the third order can keep some parts of the economy out of equilibrium, which is what engineers call positive feedback.

Arrow seemed satisfied with his answer, and Arthur could see Anderson, Paines, and the other physicists, scattered in various positions, begin to nod.Increasing returns, positive feedback, nonlinear equations, they are all too familiar with these things. Halfway through his speech, Anderson raised his hand and asked: Are economic phenomena like spin glass?Arrow, understandably, cut in immediately: What is magnetic glass?Turns out, because Arthur had read a lot of books on condensed matter physics over the past few years, he knew exactly what magnetic glass was.In fact, magnetic glass is a bunch of substances with no practical value and special magnetic properties, but the theoretical properties of this substance are fascinating.Since the discovery of the substance in the 1960s, Anderson has done a lot of research and co-authored several papers.Magnetic glass is like the familiar magnetic substance iron. Its main component is metal atoms, and its electrons have a rotational characteristic called spin.Also like iron, the spin causes each atom to generate a small magnetic field, which in turn emits magnetic forces that affect neighboring atoms.But unlike iron, the forces between the atoms of magnetic glass don't align all the spins with each other, creating a large-scale magnetic field like a compass or a magnet on a refrigerator.

Physicists nodding The force acting on the magnetic glass is completely random, which is what physicists call the state of the glass. (The attraction of the atoms in a piece of window glass to each other is similarly arbitrary; in fact, an ordinary piece of glass could be called a solid, or a particularly viscous liquid.) This atomic-scale disorder means that magnetic glasses are a complex mixture of positive and negative feedback, with each atom trying to spin parallel to some of its neighbors and counter-rotate to all others.In general, it's impossible to keep this going, so each atom has to suffer some frustration when it has to spin in parallel with some of its neighbors that it doesn't want to spin in parallel.But by the same token, there are many ways to arrange the rotation so that each atom can tolerate setbacks within reasonable limits. This is what physicists describe as a situation of local equilibrium.

So, Arthur agrees, from this point of view, magnetic glass and the economy do have the same purpose.The economy is of course a mix of positive and negative feedback, so there are many states of equilibrium.This is exactly what his increasing-return economics has been trying to emphasize. Arthur saw the physicist's head nodding more diligently.Hey, there's nothing wrong with this economic theory.Anderson said: "I really feel the same way as Arthur.We were all captivated.So the speech went on solidly for two hours: locking, path dependence, Curti keyboard and possible inefficiency, and the origin of Silicon Valley.As I went on, the physicists nodded and their eyes lit up, but every ten minutes Arrow would say: Wait a minute!Ask me to explain further, or explain why he disagrees with me.He wants to be clear about the source of every step of reasoning.When I began to explain my theory, he, like the other economists present, wanted to see clear evidence and thus slowed me down.But it also strengthens my point.

When Arthur finally sat down, he was exhausted, but he felt hopeful.My idea was legitimized that morning, not by me convincing Arrow and the other economists, but by the physicists present telling the economists that what I had done was like cattle to them. Oil is as basic as bread.In fact, they say: this guy knows what he's talking about, don't worry about it, you economists.Maybe he was just guessing, but Arthur felt that Arrow was much more relaxed. Can't see the forest for the trees If Arthur's speech fooled physicists into thinking they were the same as the Economist Channel, they were quick to correct their beliefs. During the first two or three days of the conference, since physicists had no more than an introductory economics degree in college, Arrow and Anderson invited several economists to give a general introduction to standard neoclassical theory.We were fascinated by the structure of economics and wanted to learn more about it, said Anderson, who has always been interested in economic theory. When theorems and proofs are paraded on slide after slide, physicists can't help admiring the mathematical excellence of economists. But deep down, they seemed to catch what Arthur and other economists had been clamoring for years.A young physicist shook his head in disbelief: their math was so good, they seemed so dazzled by fancy math that they couldn't see the forest for the trees.They spend too much time digesting the mathematics, instead ignoring the purpose of the economic model, not looking at what they are really doing, and whether the basic assumptions are good or not.In many cases, only common sense is needed to judge, and there is no need to rely on a bunch of mathematical calculations.Maybe, if they had a lower IQ, they would have conceived better models instead. Of course, physicists are not opposed to mathematics itself. Physics uses far more mathematics than other sciences.But what most economists don't understand (and are surprised to find out) is that physicists are relatively casual about mathematics."Their approach is a little bit of critical thinking, a little bit of intuition, and a little bit of back-of-the-envelope calculation, so their style is really different from ours," Arrow said.At first, he was also very surprised.Physicists are very conscious that their hypotheses and theories must be based on evidence.I don't know the situation of the theory like the theory of relativity, because the proportion of the theory of the theory of relativity far exceeds the observation, but generally you do some calculations first, and then verify it with experimental data, so even if the calculations are not so rigorous, the problem Not big, bugs will be found in testing.In economics, we don't have data of that nature, we don't have the means to collect data like physicists do, we have to make a big difference from a small base, so we have to make sure that every step is right. Very flat!But economists often ignore the experimental data that actually exists, much to the discomfiture of physicists.For example, it is often asked: What about non-economic factors like political motivations, oil prices, and popular psychology in the stock market?Have you consulted sociologists, psychologists, anthropologists or other social scientists?And economists, if they don't pout at these soft social sciences that they think are relatively unimportant, can only reply: These non-economic factors are not important; these factors are important, but too difficult to deal with; non-economic factors are not important. It's not all that difficult to deal with, we take them into account in special cases; or we don't need to deal with non-economic factors specially, because economic effects will automatically solve everything! perfectly rational superman Then there is the question of rational expectations.Arthur still remembers being asked on the first day of his speech: Is economics much simpler than physics? Arthur replied: From a certain point of view, yes.We call our particles actors, such as banks, companies, consumers, and governments.Actors respond to other actors, just as particles react to other particles.It's just that in economics we don't usually think much about space, so that makes economics a lot simpler. However, there is one big difference, he added.The particles of economics are smart, and the particles of physics are dumb.The elementary particle of physics has no past, no experience, no purpose, no hope or fear of the future, it just exists.This is why physicists are free to discuss the prevailing laws of the universe, because their particles respond blindly to forces with absolute obedience.But in economics, our particle has to figure out how to know how other particles might react if it takes certain actions.Our particles have to act on the basis of expectations and strategies, and no matter how you model situations, that's where economics gets really hard. Arthur said that he immediately saw that the physicists present sat up straight. This science is not simple. Although it is similar to their discipline, there are two interesting strange words: strategy and expectation. Unfortunately, economists' answers to the expectations problem are so utterly rational that they drive physicists mad.The advantage of assuming that agents are perfectly rational is that they are completely predictable, that is, they know all possible situations of the choices they will face in the future, and they use flawless reasoning to foresee the possible implications of their actions.Therefore, you can safely say that they will act in the best interest of any situation, based on the information they have received.Of course, they sometimes stumble because of oil shocks, technological revolutions, government interest rate decisions, and other non-economic surprises.But they are so smart that they can adjust quickly and keep the economy in a rolling equilibrium forever, where supply is completely equal to demand. The only problem, as physicists never tire of pointing out, is that real humans are neither perfectly rational nor predictable.And, even if you assume that humans are perfectly rational, that they're perfectly predictable, it's still theoretically untenable.According to chaos theory, in a nonlinear system (and the economy is certainly a nonlinear system), the slightest uncertainty in the knowledge of the initial situation is magnified relentlessly, and before long, your predictions are completely meaningless. They kept pressing us, Arthur said: Physicists were shocked by the assumptions made by economists, and they didn't test them against reality, but whether they were the fashion in economics at the time.I could see Anderson leaning back, with a smile on his face, saying: Do you really believe this?A cornered economist would reply: Yeah, that lets us solve a lot of problems.Without these assumptions, you can do nothing.Physicists immediately counter: yes, but so what? If it's not true, you're solving the wrong problem. rattling Economists are not known for their humility, and the Santa Fe economists would be nothing if they weren't angry about the situation.They were more than willing to complain about the lack of economics in their own circles; after all, Arrow also deliberately recruited knowledgeable critics to attend the event.But who wants to listen to criticism from outsiders?Everyone tries to be courteous, attentive, and wants the meeting to be a success.But there's still an undercurrent brewing: what's so great about physics?Why do you think you are so smart? Of course, physicists are not a group of humble and polite people. In the minds of many outsiders, the adjective that jumps out directly is: unbearable arrogance.They are not intentional, nor are they different from person to person, which is a bit like the unconscious sense of superiority of the British aristocracy.Indeed, in the eyes of physicists, they are the nobles of science.They have been infected with this culture since they took their first physics class. They are the heirs of Newton, Maxwell, Einstein, and Bohr.Physics is the most difficult and purest science, and physicists also have the most persistent and purest hearts.Therefore, if the economists were a little angry at the beginning of the Santa Fe meeting, the attitude of the physicists is the I am Tarzan and you are Jenny mentality described by Harvard economist Summers.The implication is: give us three weeks to master economics, and we will teach you how to do it right. Xin Ge, who represented Rhett at the meeting, had been worried about the potential conflict between the two sides' self-righteousness.I'm afraid that if the Tarzan effect is triggered, the whole project will be aborted before it even gets started.At first, it didn't seem impossible.Most of the economists sat at one end of the table and most of the physicists sat at the other, and I was terrified.From time to time she took Paines or Cowan aside and asked them: Can't we bring them closer to each other?However, the situation never improved. The possibility of a total loss of communication was also a nightmare for Cowen, not just because the Citibank grant could be wiped out if the meeting was unsuccessful, but because the meeting was by far the strongest proof-of-concept for the Santa Fe Institute.In the founding workshop two years ago, they invited academics to discuss for a weekend; but now they ask two very different groups of academics, both very proud, to sit down with each other for 10 days and create concrete results.We're trying to create academic communities that didn't exist before, and it's possible that meetings don't work out, they have nothing to talk to each other about, it just becomes a debate. This was not without reason, and subsequent Santa Fe seminars occasionally featured attendees yelling and glaring at each other.But in September of 1987, the gods of interdisciplinary research decided to smile again.It was wise for Anderson and Arrow to try to select scholars who were both eloquent and willing to listen; and despite the initial dismal atmosphere, the attendees gradually discovered that they had much to talk about.Looking back at those days, in fact, within a relatively short period of time, the two sides reached a consensus. Of course, it was even more so for Arthur. In his case, it only took half a day for the two parties to reach a consensus.