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.

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 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 free energy, dipole moments, molecular charges and a variety of other chemical 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 of solute and solvent 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 the dynamics of the protein, but he has to 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.

Now I usually don’t hold forth on economics on this blog, but the following 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. 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)...

6 comments:

  1. Another nice post. But early on don't you mean "hydrogen atom" not "hydrogen molecule" (which is a 4 particle system).

    Retread

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  2. Fixed the typo, thanks. The four-body problem strikes again!

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  3. Libertarians cannot implement a free market. How do you implement something that doesn't require any coercion? The socialists are the ones with the models, implementations and approximations not the libertarians. The socialists are the ones attempting to compute the correct distribution, the proper amount of taxation and the necessary amount of force to fit the system to their ideals.

    What do libertarians ask for? Let people be free. If someone would like to drive a taxi for a living, let them. Don't make them pay $760,000 for a medallion. If someone can only find a job working below the minimum wage, let them. Don't close down their factory.

    What about the monopolies? This is a myth, often held up as a trump card. Exorbitant profits attract competitors. The only way to keep competitors from entering a market against the monopoly is the force of socialists. Licensing and burdensome regulation keep monopolies afloat. The free market tears them apart or forces them to keep their profits low enough to discourage competition. If it weren't for the weakness of politicians toward anti-competitive lobbying, monopolies would not develop. The free market doesn't cause these anti-competitive inefficiencies. The socialists with their good intentions do.

    The obstacles of the free market are those who are in govt. Libertarians want to stop the meddling and let things be. The market will go through bad times for sure. But it is dynamic, self-correcting and people through their need to survive and have more will keep it efficient. The socialists are the ones with the obstacles to overcome with all their planning and regulation of human behavior. Human behavior is as unpredictable as any multi-body system, no amount of computing can fully predict what will happen and no govt rule could hope to be effective at regulating it. All they do is create inefficiency. The free market is the most efficient way of allocating resources, anything put on top of it is a perversion that skews the incentives causing what appears to be free-market failures.

    It would be better if the socialists, like the quantum mechanic, accepted that the laws of nature simply are what they are. That any model is only an approximation of what nature or free markets produce. That their ideals and goals must be held against the realities of costs and our knowledge always imperfect. Libertarianism is about becoming comfortable with those uncertainties, learning to engage it and not impose ideals of human behavior through govt coercion. It's about encouraging freedom and allowing free people to choose what is best for them, not their benevolent overlords with their statistical models.

    If I must read through 1,000 pages of Anslyn then I think you could read through 300 pages of Boaz or Friedman, before offering the world more inaccuracies about libertarianism.

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  4. Anon, thanks for the detailed comment. I will respond in detail later, but for now I have a few comments. Firstly, the choice was never between libertarianism and socialism. You are right that socialism can never work since it subscribes to a model that cannot be realized. But the point of the post was that libertarianism thrives on a model of its own, whose assumptions often are not justified in the real world. The moderate stance was always a healthy dose of free market economics with appropriate government intervention. I can't see how a system as complex as the economy can ever, at all times, be subject to any one kind of "ism". As for monopolies, the problem is that it is very difficult if not impossible to prevent their emergence; they are an inevitable product of inherent asymmetries. For the best discussion of this I will suggest "Cornered" by Barry Lynn. Finally, you say the market is self-correcting. That has often not been the case. For instance, a self-correcting mechanism will typically weed out highly polluting companies from the competitor pool. In reality this does not happen for several reasons; big corporations lobby hard in Washington and people are not always able to protest since firstly they may not even have the information and secondly because they don't have the muscle to be able to do things. This has been clear in the last thirty years, where most corporations have paid huge fines and continued to pollute (don't get me wrong; socialist countries polluted as much or even more, but the other side remains culpable). Again, the main point of the post was libertarians don't have actual solution to overcome obstacles which are simply a product of human nature. Until these solutions are not available, other methods will have to contribute to the alleviation of the obstacles, no matter how imperfect.

    And yes, I did read Friedman. It's worth noting that at the end of his life he felt that his successors had overextended his ideas into domains where they would not necessarily be productive. Kenneth Arrow still says this about his own work. There is no doubt that the free market generally leads to great prosperity; the flaw was in assuming almost as a mathematical axiom that a free market with varying degrees of government intervention is inherently flawed. In any case, more later. Have fun with the exciting Anslyn and Dougherty!

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  5. Pollution is another trump card that libertarians constantly get handed. When it comes to this, I must bring up Sowell's three questions: 1)Compared to what? 2)At what cost? 3)What are the hard facts?

    These questions are rarely answered by environmental advocates. Did BP cut corners? According to the law and media, yes. But they lowered costs, drilled the deepest well in history and bought hope that the world would be able to find oil in new frontiers. Their challenge was met with disaster, which they fixed at incredible depths and even shared their solutions with the industry. They also willingly accepted the liabilities incurred by their experiment.

    However, to everyone I speak to, they were heartless, greedy bastards who needlessly destroyed the gulf for many years. They all cling to an unsubstantiated ideal to which we must compare. They never bring in the hard facts, how much is safety worth? $4/gallon...$10/gallon?

    We could eradicate "pollution", "risk" and human caused "disaster" completely. But I would assure those who tried, those left standing would be mostly naked, starving and billions less in number. The wealth we've obtained to this day may have ugly and necessary costs. However, we should keep in mind the ugly realities we were trying to escape in the first place.

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  6. Excellent post.

    I always find it dodgy when economists claim that allowing anybody to do anything will results in greater good.

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