Wednesday, September 29, 2010

Why the free market is like quantum mechanics

If we were all omniscient and had infinitely fast and perfect computers, maybe we could use quantum mechanics to explain chemistry and biology. In reality, no amount of quantum mechanics can completely explain the chemistry that goes into treating a disease with a drug, baking a cake or making a baby. Why? Because the system is too complicated, and we don't even know all the factors that make it tick yet.

Now imagine someone who has started out with the honest and admirable goal of trying to apply quantum mechanics to understand the behavior of a biological system like a large protein. He knows for a fact that quantum mechanics can account for (a far better word than explain) all of chemistry- the great physicist Paul Dirac himself said that. He has complete confidence that quantum mechanics is really the best way to get the most accurate estimates of various properties for his system.

But as our brave protagonist actually starts working out the equations, he starts struggling. After all, the Schrodinger equation can be solved exactly only for the hydrogen atom. We are dealing with a system that’s infinitely more complex. The complexity forces our embattled savant to make cruel approximations at every stage. At some point, not only is he forced to commit the blasphemy of using classical mechanics for simulating his system, but he has to actually stoop to using empirical data for parameterizing many of his models. At one point he finds himself fighting against the Uncertainty Principle itself!

In the end our hero is chagrined. He started out with the lofty dream of using quantum mechanics to capture the essence of his beloved protein. He ended instead with a set of approximations, parameters from experiments, and classical mechanics-derived quantities just for explaining his system. Prediction was not even an option at this point.

But his colleagues were delighted. This patchwork model actually gave fairly useful answers. Like most models in chemistry, it had some explanatory and predictive value. Even though the model was imperfect and they did not completely understand why it worked, it worked well enough for practical purposes. But this modest degree of success held no sway for our bright young scientist. He stubbornly insisted that if, just if, we had a perfectly fast computer with unlimited accuracy and an infinite amount of time, quantum mechanics indeed would have been spectacularly successful at predicting every property of this system with one hundred percent accuracy. Maybe next time he should just wait until he gets a perfectly accurate computer and has an infinite amount of time.

The preceding parable was narrated to describe what I think is a rather unwarranted swathe of criticism coming from libertarians about the financial crisis during the last few years. For instance see Amit Varma's criticism here which sums up many of the major points. The reasons for the financial crisis are many, probably more complex than quantum mechanics, and society will surely keep on debating them for years. But one of the most common reasons cited by libertarians (usually in the form of a complaint) for the failure of the economy is that we should not blame the free market for what happened because we never got a chance to actually have a free market. If only we got a chance to have a perfect free market, things would be lovely.

Notwithstanding the fact that this argument inches uncomfortably close to arguments made by the most vocal proponents of socialism in the twentieth century (“There was nothing wrong with the system per se, only with its implementation”), I think it’s a little nutty. Maybe a perfect free market wouldn’t have led to the crisis, but that’s like our young chemist saying that infinitely accurate computers and quantum mechanics would not have led to the kind of imperfect models that we get. The problem is really that there are so many practical obstacles in the application of quantum mechanics to a real-life chemical system, that we are simply forced to abandon the dream of using it for explaining such systems. Unless we come up with a practical prescription for how quantum mechanics is going to address these real-life obstacles without making approximations, it seems futile to argue that it can really take us to heaven.

To me it seems that libertarians are ignoring similar obstacles in the way of implementing a perfect free market. What are these obstacles? Most of them are well known. There’s imperfect competition because of the existence of inherent inequalities, leading to monopolies. There’s all that special interest lobbying, encouraged by politicians, which discourages true competition and allows monopolies to get a head start. There’s information asymmetry, which simply keeps people from knowing all the facts.

But all these problems are really part of a great problem- human nature itself. All the obstacles described above are basically the consequence of ingrained, rather unseemly human qualities- greed, the lust for power, the temptation to deceive, and a relentless focus on short term goals at long term expense. I don’t see these qualities disappearing from our noble race anytime soon.

Now sure, I think we can completely agree that the free market was invented to curb some of the worst manifestations of these qualities, and it has worked remarkably well in this regard. Remarkably well, but not perfectly so. Maybe libertarians need to understand that the last vestiges of the dark side of humanity cannot be done away with, since they are an indelible part of what makes us human. So unless they come up with practical ways in which they can surmount these obstacles, in which they can solve the problem of human nature itself- a difficult goal to put it mildly- it’s rather futile to keep on chanting that all our problems would be solved if only we could somehow make these inherently human qualities disappear.

The final argument that libertarians usually make is; just because there are obstacles in the way of a goal (the perfect free market) that may seem even insurmountable, that does not mean we should not keep on striving towards the goal. I think that’s perfectly laudable. But the problem is, unless you come up with a practical solution for all the problems that you face on the way, your goal is just going to remain an abstract and unworkable ideal, not exactly the kind of solution that's desirable in the practical fields of politics and economics. More importantly, all this striving towards the goal may create problems of its own (the science analogy would be unimaginably expensive calculations, scientists laid-off because of the lack of results, overheating of the computers leading to fires etc.). We have all seen these problems. There’s the well-known problem of externalities, there’s the problem of unregulated firms getting ‘too big to fail’, there’s the problem of growing income inequality. Surely we have to admit that these are real problems too.

So what should libertarians do? Well, didn’t our intrepid quantum mechanic grudgingly accept the intervention of approximations and parametrizations? These seemed ugly, but he had no option but to use them, since quantum mechanics simply could not solve all the obstacles in his way. Similarly, perhaps free marketers could realize that at least in some cases, government intervention, no matter how ugly it may seem, may be the only way to reach a workable goal. Sure, it may not be the best of all goods, but it could be the least of all evils. What would have happened if our bright young scientist had kept on insisting that he wouldn’t budge an inch if he is forced to use anything other than quantum mechanics? He would have ended up with nothing.

And in economics even more than in chemistry, a model that partly works is better than a model that does not exist. “Sometimes it’s not enough to do our best; we need to do what’s necessary” (W. Churchill)...

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