(11/13/2013)
An event of a different kind, beyond art and minimal art more so, but still of interest, at least for me. Prof. Scholes was awarded the Nobel Prize in Economics for the Black-Scholes option pricing model (a mathematical model of the financial market containing derivative instruments). The lecture at CityU was directed towards a broad audience, and thus touched on broad topics mostly. Scholes basically presented a number of possible scenarios how the economy is about to evolve in the coming years: From recession to recovery or from recession to stagnation/restructuring (as has happened in Japan in the 90’s).
For the positive (first) scenario, he went into much more detail, highlighting individual trends leading to the recession and ways supporting the feasibility of a rebound. Instead of following all that Scholes said, let me just mention the trends he believes will make the difference for the U.S., which I found interesting:
1. In-sourcing – rebound by technological advantage
2. Idiosyncrasy – product customization to replace mass production (i.e. 3D printing) and
3. Energetic self-sufficiency (reducing cost of power failure).
All three points should lead to a fall of U.S. current account deficit by increasing self-sufficiency. I am not very clear here how Americans will substitute their overconsumption and reliance on imports of cheap stuff by the aforementioned points, if the economy is not supposed to shrink. And then we could hardly talk about a ‘rebound’ or a positive scenario… however maybe it will be a positive scenario for China, that, as Scholes expects, will fill up the space cleared by the U.S. dollar through the internationalization of the Chinese Yuan and the set-up of WB/IMF ‘competitors’ .
Scholes was much briefer about the negative scenario (stagflation), as even Japan is still really looking for a way out of such a situation, and it may well be the precursor of a new global growth status (quo). Most worthy to mention from this part of the lecture are probably the fallacies of credit stated by Scholes:
1. (Gov’t) debt can be solved by (gov’t) lending: In reality, it can be only solved by inflation (devaluating the ‘real’ debt).
2. People are entitled to a better life: In reality giving citizens a ‘better life’ through spending will not produce any ‘good behavior’ – productivity increase, willingness to give back – later.
3. Prosperity can be exported: In reality, it cannot.
Scholes concluded his talk by another 3-sentence phrase: “I don’t like politics, I love technology, and I am interested in people”.
The obvious difficulty with this statement is that those three parts cannot be separated. People use technology to do politics. Scholes’ mathematical models are also a kind of technology that is being used by people, and thus cannot exist outside of politics. Scholes’ theories actually embody a firm set of beliefs – one kind of politics. On the other side, one must take sides in order to move forward in a direction, and this was the positive part to be taken from that statement. Even though quite generic, the lecture still gave a glimpse into Scholes’ thinking, into his belief in the market and distrust for any government interventions – his political position.