Wednesday, December 3, 2008

The Economy As Schrodinger's Cat

This post is lovingly dedicated to S.

Today, an oblique homage from the dismal science (economics) to Erwin Schrodinger, a real scientist. As you may recall, he was the quantum physicist who discovered the eponymous equation (simplified version below).


Schrodinger's Equation For A Single Particle In Three Dimensions

Are we having fun yet? Is this gibberish not what you signed up for when you clicked on Sudden Debt today? Do try to hold on, however, because Mr. Schrodinger most famously also devised the well-known cat-in-the-box thought experiment - and that's our topic today. (After a fashion, anyway...).



Just like the cat inside the box, is the US economy currently dead or alive? Does it follow quantum mechanics, meaning that the two states are superimposed and the economy is both dead and alive? Finally, does the mere act of observing the state of the economy affect the outcome?

Let's start from the latter: yes, observation does affect the economy - if the observer is a presumed expert like the Fed Chairman or the NBER, whose dicta carry considerable weight. (Well, not so much their actual looking at the economy as what they say about it - the analogy with quantum physics is not perfect, but you get the point.) More significant is the fact that they have to look at the economy and they have to pass judgment on its health. Unlike the physicist running the cat experiment, these experts are obligated to look inside the box and thus collapse the superimposed states into one.

Currently, every expert has quite apparently looked at the economy and pronounced it dead. In fact, the NBER just post-dated their death certificate and now says that the recession started a full year ago, in December 2007. Could it be that the dismal scientists are currently attempting to convince us that the worst is already behind us? I mean, how can one constantly observe a cat and only decide today that it died a year ago, hoping that the pronouncement will bring it to life tomorrow? The mind boggles... even quantum mechanics doesn't allow for such cavalier treatment of time.

For my money, the economy is still inside the box - it is still both dead and alive. Some dead sectors (finance, real estate) are superimposed upon some others that are very much alive (alternative energy, organic farming/food). Yet other sectors are both dead and alive at the same time, like the auto industry which is dead at the combustion engine end, while being reborn at the plug-in hybrid end.

There is opportunity around, that's for sure. Just make sure that your money's on the right cat.

_______________________________

Note: People are asking for "cat" ideas in the comment section. There are plenty here:Hot, Flat, and Crowded: Why We Need a Green Revolution--and How It Can Renew America, Thomas Friedman's newest book. He may not be a scientist or engineer but he does speak with a lot of important and relevant people.



27 comments:

Anonymous said...

i have been reading your posts religiously for 2 years (never commented) and this is most "optimistic" i have read. thanks. humanity needs a modest amount of optimism.

OkieLawyer said...

I bought my first stock yesterday. It was a traditional energy company with almost no debt. I figure they can weather the downturn and buy up other energy companies at a discount. The particular one I bought also had technical support as the 10- and 20-day SMAs just crossed the 50-day SMA. I think that usually portends a reversal. I guess we'll see if I read the tea leaves right or I'm just "catching the falling knife."

I am closely monitoring the alternative energy sector; but the problem there is that the credit crunch is prohibiting them from getting needed capital to expand. It is on my list to invest in, but not until the can get the needed funding.

Hellasious said...

Re: capital for alternative energy

There is plenty of money around for the right projects. Don't look for whiz-bang, pie in the sky stuff. It's the ho-hum proven technologies that are getting the money, e.g. wind.

The EU in particular is driving this business through mandatory emission reduction legislation and incentives.

Anonymous said...

Schrodinger had it all wrong. Time doesn't exist. Math is used to describe the physical relationship of entities. We have defaulted to using time to simplify the math....


http://www.newscientist.com/article/mg20026831.500-what-makes-the-universe-tick.html

Hellasious said...

Re: optimistic

Yes, indeed. Goodbye George, hello Barak has definitely helped the mood, if not necessarily the facts.

Joe said...

"I mean, how can one constantly observe a cat and only decide today that it died a year ago, hoping that the pronouncement will bring it to life tomorrow?"

Only an economist can do that. Economics is a pseudo-science, at best.

Joe M.

Anonymous said...

hell - not looking for specific names on wind - but can you point to any research/ articles/ websites/ books that discuss wind. vestas (adr) seems to be one of the few pure plays but having difficulty finding relevant industry research...

Camabron said...

Bill Gross's Investment Outlook for December hits the nail on the head:

"My transgenerational stock market outlook is this: stocks are cheap when valued within the context of a financed-based economy once dominated by leverage, cheap financing, and even lower corporate tax rates. That world, however, is in our past not our future. More regulation, lower leverage, higher taxes, and a lack of entrepreneurial testosterone are what we must get used to – that and a government checkbook that allows for healing, but crowds the private sector into an awkward and less productive corner."

It's what hellasious has been writing about for some time already.

Here's the link to Gross
http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2008/IO+Dow+5000+Gross+Dec+08.htm

Anonymous said...

Happened to read a piece in the mainstream media that felt like a breeze of fresh air (by a Rotschild, no less):

http://news.bbc.co.uk/2/hi/business/7754768.stm

hopemonger said...

Just make sure that your money's on the right cat.

Here kitty, kitty, kitty....


When shifting paradigms, try not to grind the gears or burn out the clutch. And whatever you do, don't let the pigeon drive the bus.

Thai said...

Way cool post!

Also, it seems your crystal ball is not so cloudy after all.

Anonymous said...

Hell,

I've been reading you posts for a year now. Great post today!!

Meow

Another Anonymous said...

I believe many of you will find this article interesting:

http://monthlyreview.org/081201foster-magdoff.php

Greenie said...

Alternate energy???? Hell, will you ever give up? Do you ever bother to leave your ivory tower and check the price of crude oil from time to time?

Your peak oil forecasts are no better than David Lereah calling for come back of housing market in 2005, 2006 and 2007. At least that guy had the sense to quit :)

Anonymous said...

The axiom of limitation of size implies the axiom of global choice because the class of ordinals. The usual axiomatic systems are unable to demonstrate their own consistency. Zero sum games involving perfect information (in which players know a priori the strategies of their opponents as well as their consequences)

Marcus said...

Hey anonymous, ya got a point there but where a hat and nobody'll notice

Brian Woods said...

Greenie,

Please check the ENERGY cost of producing energy (in its various forms). The money cost is totally irrelevant - except you are an accountant or economist. If the latter, then consider implicit costs, ie. Normal Profit.

Entropy is a significant external cost - which cannot be zeroed because analogue reductions in entropy require exponential increases in energy expenditure. Entropy is unknown to, or ignored by economists and accountants, but it punches a significant hole in Normal Profit.

Alt. energy is not a saviour for the Permagrowth Economy - its a temporary prosthesis. Imagine the Twin Towers being lowered by hydraulic jacks instead of collapsing under their own inertial mass.

Peak Oil! Not a problem - but Peak Energy is!

Brian P

Thai said...

Marcus- I think anon is basically restating the law of the conservation of risk, i.e that risk is always conserved.

Is that you reading?

dink said...

*Got my thinkgeek.com catalogue in the mail. They have 2 t-shirts for sale; one saying the cat is not alive and the other saying it is.

*(Stolen from 11/25 Naked Capitalism)Schrodinger's Parrot?

"This financial system is no more! It has ceased to be! ‘It’s expired and gone to meet its maker! ‘It’s a stiff! Bereft of life, it rests in peace! If you hadn’t nailed ‘it to the tax payer’s perch it’d be pushing up the daisies! ‘Its metabolic processes are now ‘istory! ‘It’s off the twig! It’s kicked the bucket, it’s shuffled off its mortal coil, run down the curtain and joined the bleedin’ choir indivisible!! THIS IS AN EX-FINANCIAL SYSTEM!!”

*Greenie, you do realize that there are other reasons to switch from oil to alternative energy besides price, yes? Did you ever read Catch 22? There was a character named Milo Minderbinder who stole morphine out of first aid kits meant for his fellow soldiers. He couldn't abide by the idea that it was just sitting there not making a profit for anyone.

Greenie said...

I heard all these entropy and other arguments, but do not understand the part that our dear commie hell advocates - 'government must do something'.

Moreover, among the crazy solutions that he proposes, one is to distort our money (currency). Why don't you trust nature (of which human beings are a part) to take care of its own supply-demand problem?

Replace oil with oxygen and tell me, why government should not intervene into oxygen market as well?

(i) every organism uses oxygen,

(ii) permagrowth of human population is not possible, because the world with run out of oxygen,

(iii) government must do something to move people away from using oxygen into alternate breathing mechanisms. They should tie up their currencies to number of alternate breathing devices invented by the country.

Greenie said...

Hey guys, I found a blog that reminds me of those days, when Hell was young. This guy started his blog three months back, and therefore has lot of passion left.

http://ashizashiz.blogspot.com/2008/12/global-poker-tour-allegory.html

They say that the food is always great, when a restaurant starts its business.

Hell is still exceptional, but he doesn't tell us elaborate stories like those good old days.

Brian Woods said...

Greenie,

Dismissing (or perhaps attempting to ignore) the issue of entropy is not wise. One does not argue about entropy - entropy is an absolute, universal law. You can certainly dispute the value of the entropy of specific exothermic processes (use of fossil fuel energy sources for example), but you had better have your data straight.

Try these. (ketchup not supplied)

1.All credit cards are canceled forthwith. No exceptions.

2.All loans are regularly decremented in line with deflation.

3.Interest of any sort is prohibited on all loans. A standing charge to maintain the loan is acceptable.

Think these moves might get the capitalist economies back onto an even keel? When did credit cards become ubiquitous anyway?

Brian P

Anonymous said...

This is post is genius, it's a great analogy and i loved the punch line. It's up there with my top ten blogs of all time.

goldie said...

Surely a goner based on the schroindinger cat analogy. Even if the poison is not tipped over or cut open, the cat is still continuously exposed to radioactive material on a continuous basis. Cancer is an inevitability, no?

Our healthy economic sectors are continuously exposed to bureaucracy (talk about inside the box)along with the notion that a downside in the business cycle for certain entities dubbed "too big to fail" is unacceptable and must be circumvented with a remedy that will succeed in only destroying the dollar.

The cat avoids the sudden death and is left with cancer.

Earth said...

Schrodinger? See here:

www.meyl.eu/go/index.php?dir=10_Home&page=1&sublevel=0

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Anonymous said...

So we got the crappy reality with the poverty and bad goverment.


Damn.