Friday, October 26, 2012

Economic inequality

I have long thought about the causes, nature and effects of economic inequality amongst people. It includes inequality of income, wealth and opportunity. My first essay on this matter was written in September 2005 (available here). It attempted to forecast two long term paths of evolution possible as regards inequality. One was the utopian path where inequality dwindles with increasing average level of prosperity – due to reducing population, increasing stock of capital and increasing productivity. The other was dystopian path where inequality is forced down by uprising amongst the have-nots, but the overall prosperity on the decline. I had then taken no stand regarding which one was more likely.

The topic was brought forward in my thinking by what was probably an interesting set of co-incidences. Firstly, I recently came across and bought two books on inequality namely "Price of Inequality" by Joseph Stiglitz and "The Winner Take All Society" by Robert H. Frank, Philip J. Cook. One talks of the general increase in inequality in US in particular and its likely ill-effects on the American society. The second talks of the institutions which have evolved in the modern society – mostly informal, some formal – that make for a winner-take-all situation across most major walks of economic life.

Secondly, I happened to start reading "The General Theory of Employment, Interest and Money" by John Maynard Keynes, around the same time. I am still on the first few chapters. It is clear from this part already that Keynes was fairly unorthodox in his approach and wrote the book primarily to question the classical economic theory assumptions, and proposing an alternative. Part of the theory relates to the full employment ideology of classical economics and its theoretical limitations which make it so unlikely to observe in real life anywhere.

Thirdly, the latest issue of The Economist (link here and here), speaks of a progressive politico-economic system that attempts to reduce inequality without hurting economic growth. It echoes part of Stiglitz’s ideas including the claim that inequality now has reached a level that threatens prosperity of many (if not all, eventually) and is clearly sub-optimal. This is different from the typical neo-classical position that some amount of inequality is inevitable and probably even desirable to allow for genuine difference amongst individuals as regard their endowments, skills, risk appetite and some would say even luck. The desirability of inequality comes from its effect on entrepreneurial individuals who in the pursuit of individual riches end up enriching the society as well – through inventions, better run organizations, innovations, new products and so on. Some have now started wondering if the current level of inequality is well past the basic minimum required to get all these benefits.

My thoughts in this matter are driven by two independent starting points/positions. For one, I believe that the extent of opportunity, behavior of entrepreneurs, nature of institutions and intervention from government are not uniform across time and space to make any material statement about inequality which is general and universally applicable in nature. Coming to the specific question of current times, in advanced economies and in emerging economies, and especially in India, can we say that inequality is too high and is likely to start affecting collective well-being?

The west has it worse. The opportunities have gone down, corporations have started to become predatory, profit pursuit has pushed low end jobs out of the economies and service sector is reeling under real estate bubble burst and financial services crash. In the interim the capitalist institutions have made it difficult for all but the most innovative and lucky entrant to make it big (a Google here, a Facebook there but nothing else). The shortage of opportunities means that everyone is now looking to grab share from others rather than try to create new “pies”. The governments across the rich world are divided over their response. The left leaning ones (current US, France, Scandinavia) are using Keynesian fiscal intervention to boost falling incomes thus hoping inequality does not become worse. The right leaning ones (Romney’s US) are likely to go for lower fiscal spend and smaller government intervention. Beyond that though, as Stiglitz painstakingly details, rent-seeking on part of the established corporations is not always necessarily through explicit government largesse. A variety of other mechanisms persist. Depending on the relative strengths of the transparency-seekers (mostly NGOs and some individuals and rare politicians) on one hand and the rent-seekers (mostly large corporations in some industries) on the other this may play out to favor few or the many.

The emerging markets are not that badly placed. Growth has slowed down but not enough to warrant a grabbing of each other’s pie yet. There is a different problem that is starting to plague emerging markets though. The emergence of rentiers – connected with and benefitting from the government policies – is causing at worst loss of welfare and at best serious distraction from pursuit of prosperity by the general public and the well meaning companies.

The economic future of the emerging markets hence is likely to be strongly influenced by how the rentiers are handled. If they were to have a free reign, inequality will increase and to make matters far worse, people’s prosperity will not! The political and economic institutions in the emerging world hence have the nuanced task ahead of them – to leave the economic participants alone to pursue growth and prosperity while guarding against the most unscrupulous of the lot that is trying to grab economic rents (wealth without adding value).

The second starting point of my position is the relevance of wealth for individual well-being. Our global social evolution in last few years is towards the milieu of supremacy of money and wealth as the ultimate and overarching drivers of well being. This trend has been more pronounced in Anglo-Saxon world (US, UK), BRICs and Middle East while considerably attenuated in Western Europe and probably Japan. In general though, we have started implicitly or explicitly agreeing with the money income and consumption being the most important drivers of individual well-being.

This trend has meant a vigorous pursuit of higher incomes and consumption at the cost of much else. While the liberal position on this matter is to leave people alone to decide their preferences, the real life society knows that it influences the thinking and value system of its constituent individuals. Hence while everyone is free to believe what she thinks is right, she has to start some place in deciding this – and that’s where the social set up she finds herself in exerts the most powerful and yet most subtle effect. In the context of individual pursuits hence most individuals in the modern world are under a fair bit of pressure to earn more and spend more. There are more opportunities to earn and there are more avenues to spend.

The less heeded part of the equation though is that the link between consumption and well being is not linear. At low levels of consumption, more is definitely better. At higher levels, more is neither necessarily better nor worse. The rich are not miserable at all, but they are not happier as a rule. An empirical graph I came across in this connection showed a very low variation amongst individuals at the lower end of this consumption-wellbeing curve. This means at low levels of consumption, as income and consumption grows, most people become better off. Hence one can be confident of a trend. At high level of income and consumption the variation balloons. Now there is no trend. Some individuals get much better off with more income while others are unaffected and many become worse off.

If we took away the emotionally charged titles of the x and y axis and showed the scatterplot to any student of statistics or econometrics, she would tell us that these variables are not correlated – there is no statistically significant relationship between them. Hence it is most likely that at these levels of income people are better off or worse off because of entirely other factors – health, fame, meaning etc.

What does that have to do with inequality? Well, the optimizing optimist in me thinks that the informal institution of unlimited wealth pursuit that we as a society have established is in complete contrast to what our nature allows us and offers us in terms of well-being. Inequality, from the standpoint of a grand population level optimization, is irrelevant when it is relatively small but is terribly sub-optimal when it is large. It gets worse because of the constant reinforcing feedback it provides to the sub-optimal institution of unlimited wealth. Solutions? That is a long path! (The Economist’s special report on true progressivism might be good starting point, though)

Monday, August 27, 2012

Quantum mechanics and a revision of epistemological belief

I have signed up for a course on Quantum mechanics and quantum computation at – a very interesting site for a wealth of short courses from 18 of the world’s best universities. As I went through the course, I came across a very intriguing characteristic of quantum mechanics namely the nearly untrue mathematical abstractness of it all.

To be fair, the greatest minds in quantum mechanics had always maintained that there is nothing intuitive about quantum mechanics. Consider this quote of Niels Bohr for example,

“If anybody says he can think about quantum physics without getting giddy, that only shows he has not understood the first thing about them.”

As I went through some of the basic principles, I realized how true this was. Coming to the more direct impact on my thinking though, I have been forced to revise my near-religious faith in the “trueness” of the theories of physics. From a rational point of view I have always believed (after the first year at IITB, post the course in introduction to philosophy) that no knowledge is certain, no theory is “right” (but many are wrong!) and there is no finality to any of our understanding of the world. Everything is tentative and subject to refinement – not only in calculation and observation but also in the very model of reality we have constructed on the basis of it.

However, emotionally I was always a believer in our current model of the universe – however incomplete it might be. The belief was that it was in the generally correct line – and needed refinement. As I think more objectively, it is qualitatively no better than the worldview few centuries ago (and I might even go a step further and say many thousands of years ago as well).

Why is that? Well, for one, quantum mechanics is a reaction to the various paradoxes observed at the atomic level (e.g. the wave-particle duality of photons). It does not seem to answer why nature is organized a certain way, it only aspires to describe its working in a manner consistent with observation. That in itself is an ambitious goal no doubt. The abstractions required to achieve “explanability” in quantum mechanics sometimes robs one of any intuitive feel for it.

That is an absurd criterion for something being right, I understand. Intuition is a faculty evolved in human beings for purposes entirely different from understanding the nature of reality. Hence intuition does fail very often while considering phenomenon far removed from day to day life in terms of size, complexity and duration. That does not make these phenomena non-existent or inexplicable. The description of such phenomena will hence remain a story legible to our rational minds but not to our intuition.

So far so good! But that also means I have no way of knowing if the theory is any closer to truth than the earlier one. It fits experimental observations better – but that is a very indirect and circumstantial evidence. One may point out that that is pretty much all on offer in the current organization of our present universe. However, that is tantamount to saying – this is life, live with it. It does not make the theories more accurate. Hence the abovementioned revision in my faith in physics.

What is the revised thought then? It goes as follows. Physics and allied sciences are human endeavours to understand the way nature works. They are supported by human faculties of analysis and imagination as also apparatus for making measurements to an appropriately desired level of accuracy. The models of reality produced by these endeavours are working prototypes of the way we see the world. Like any other models the following basic truth applies to them – “all models are wrong; some are useful!”

Monday, June 18, 2012

Macroeconomic thoughts on the prosperity

A very interesting mix of intellectual and contextual inputs marked recent weeks for me. I have been reading the "Introduction to Post-Keynesian Economics" by Lavoi while also ruminating about the nature of money in general. In parallel I chanced upon a copy of the Communist Manifesto that I had bought some time ago. Last but not the least, I had a short vacation in South Africa last week - which prompted me to think about the issue of macro-level prosperity yet again.

Conclusions first. Firstly, the macro prosperity of a given society is a very strong function of the amount of work people are willing to do and their ingenuity. The first decides the total amount of person-hours available to the society while the latter influences how well these hours are utilized.
Secondly, the distribution of wealth and income amongst the members of the society is driven by the institutions evolved within the society. Institutions here is used in a much wider sense of organizations of all sorts as well as established conventions and social habits. Private property, rule of law, rational system of justice, centralization of use of force to the state, international trade relations driven by nations etc are all examples of institutions.

Now to the details.
What makes a group of people more or less prosperous? Let us first define prosperity. Without attempting to be exhaustive and accurate, I would describe (rather than define) prosperity as the state of availability of almost all basic necessities of life (list subjective) and ample access to the opportunity to get the incremental luxuries (list subjective). US and Scandanavia are definitely prosperous, India is not and South Africa has islands of prosperity in it.
Now that we have described prosperity, let us conduct a thought experiment on a group of say 10 people in a decentish farm land. To start with let us say that they all work at the farm and produce enough to eat for everyone. If they work little harder, they will have more to eat and vice-versa. This amounts to the first half of the first of our conclusions above. In general more work the society does, the more it has to consume.
Now to the trickier developments. Let us say someone discovered the wheel barrow (who discovered it specifically is irrelevant now, but highly important in the later part below on distribution of wealth). Now 5 people are enough to produce more than enough for everyone to eat. Let us say these 5 already produce more than the 10 did earlier.
It is logical then to hope that either all 10 will work half of what they did earlier or 5 will start to work on something else. Mathematically these are idential possibilities. However, behaviorally it is unlikely that all 10 will work proportionately less. Even if they do, they will tend to use their spare time as if 5 were upto something else.
The big question is - what do these 5 do? That brings us to the second half of the first half of our conclusions. If the society is dumb (smaller brains, malnourished people, lack of proper communication or any other hindrance to being smart), they will be effectively forced to idle. What happens here then goes already into the second conclusion of distribution of wealth. Let us park it for now and return to what non-dumb societies do. Mostly the spare 5 people will engage in creating some goods or services which would improve the society's consumption - and thus welfare and prosperity (calm down environmentalists and rural utopianists - i know consumption is not welfare and all that, i am barely refering to this very primitive group of farming 10 people only).
They could weave better clothes, improve farming further, write poetry or study the movement of stars for season predictions. Either way, if they do something that adds value to the society as whole, they will end up improving general standard of living.
They could idle out of choice as well. Which together with the fate of the dumb society, brings us to the question of distribution of wealth.
In the all-10-farming mode, let us say they were sharing their produce generally equally - not entirely independent of the expectation that they were also probably producing similar amounts anyway. Now if the discoverer of the wheel barrow decided to keep the invention private and use it to make extra produce for herself, the economy of this small society would evolve differently. This discoverer would then start to "save" some produce - to the extent feasible. Eventually she would be able to "hire" the services of some others to farm for her using the wheelbarrow. At this stage, the smart society will still do well since its individual will then quickly move to doing something else useful. There is a catch though. What is useful will start to get influenced by the now richer members of the society. That is still not too bad if the not so rich still get to use some of the new goods and services.
The dumb society is not so lucky. If the spare personhours are not spent on anything "useful" in any way, very soon, the discoverer of the wheelbarrow will start to use her produce to buy everyone's time to her bidding. In effect thus, she and her employees are now producing everything that the society needs in terms of food. As stated above, the wheelbarrow allows 5 alone to produce all that the society as a whole demands. The balance 5 (either actual 5 people or half of everyone's time) now are "unemployed" in the conventional sense. The income has shifted in favor of the discoverer and there is sustained unemployment in this society. This by the way, will be the new equillibrium - with the macro output of the society same as earlier but distribution much different from earlier.

This taken to the logical conclusion points to the painful reason for more complex modern economies to remain in low prosperity levels for long periods of time. This is the reason of institutional constraints. These constraints thus effectively make a society dumb - while the individuals are quite smart in isolation, the collective is dumb because the way they organize themselves has structural limitations. A low prosperity society thus is essentially a suboptimally organized group of people in terms of its economic institutions. Agreed that it can be dumb as well and may have cultural reasons to be low on hard-work as well as ingenuity. But taken at the level of modern nation states, the statistics alone of the typical distribution of human attributes of intelligence and creativity would dictate that each modern country would have a fair number of smart people and would thus be adequately endowed.

Where to from here?
Well, the biggest task of a modern state on the front of pursuit of economic prosperity for its people is to simply build and promote a set of institutions that make the economic organization optimal - weeding out the obstacles and outdated institutions being a part of this task.
In English that would translate into the following
1. Relevant skill building through education (not arts, science, commerce but vocational and actual application oriented skills - while keeping arts for the genuine scholars of languages and social studies - not entirely different from what the recent movie "Faltu" propounded)
2. Promoting creation of new goods and services (increasing productivity in agriculture and manufacturing would keep reducing the labor intensity of these industries and its important to keep using the spare personhours to keep exploring something new that people can buy)
3. Democratizing access to credit while maintaining acceptable governance standards - microcredit and mSME credit is a good start but profit seeking in these by banks and credit providers might suck out most of the value generated by them into returns on capital rather than on labor.
4. Keynsian state - using spare capacities everywhere (and especially through slower times of business and agri cycles) to create public goods - to which there is no end. One can start with the essentials like roads and ports and slowly move to creating stadia, large hadron colliders (and even pyramids for crying out loud, if everything else seems to be in place).
(This state will create money supply in the process but in the post-Keynsian thought, that is almost immaterial. More on that later.)

The above translation into English of the first para of "Where to from here?" is highly India-centric. Greece could revive its economy using some other interpretation of this first para and US and Japan could interpret it in their own ways.
For exmple, in Greece, the people indeed seem to be working far less than what the national income seems to suggest and that is funded by loans. The sub-optimality of economic organization there is that the prosperity is based on access to cheap loans and that needs correction.
For US, the over-reliance on real estate and financial services activities was the sub-optimality and correcting that would mean getting people to start being skilled in some other things and starting to produce those - how about cars, defence equipment or some version of modern-day pyramids (say a much bigger international space station) - considering the low cost of borrowing for the American state.

Sunday, May 13, 2012

Eurozone - the real issue of half baked integration

As the Greeks contemplate exiting the Euro and the Spanish continue to suffer from not only increased unemployment but also the constant spectre of loss of access to bond markets, one tends to forget some obvious macro features of Eurozone that make it financially no worse than US. And yet, bond investors are piling on US government debt at negative real yields (with murmers of the government looking for ideas to introduce negative nominal yields too!) and shunning most of the Eurozone debt.
They are not wrong!
For one, Greece did default and did it with quite a large margin (nearly half of the face value of the bonds) and nobody "rescued" the bond buyers (other than of course the european banks - which got doles from ECB). Secondly, there is a fundamental problem with Eurozone economies which differentiates them from US.
This is the problem of half-baked integration of the economies. The Euro area is a common currency zone but there is no fiscal integration of the sort seen in a single country. If currency is same but bonds are different for a group of countries, it is likely to produce some difficulties which will not exist for a single currency country.

The obvious remedy to any massive unemployment is not available to Spain or Greece - or for that matter to Germany either. This is the remedy of very loose fiscal policy for a controlled period of time. It needs to be accompanied by domestic banks buying large amounts of government debt and a parallel incentive for everyone to spend rather than save - at least through the crisis. Counter-intuitive as it may sound, this obviously props up aggregate demand and keeps the government funding domestic - thereby reducing dependence on global bond markets. (One reason that i maintain that India's rating by S&P and Moody's etc is utterly useless is that Indian government has no foreign debt to speak of and almost all of its debt is domestically funded, ditto for Japan.)

Eurozone countries' fiscal independence is a mirage though. As shown by North Europe's insistence on the "fiscal compact", any help from north is contingent on austerity - exactly at the time when it hurts the most.

How is US different? For one, it has a single federal government that runs most of its budgets and deficits thus issuing bonds. Also unlike individual Eurozone countries, most of its debt is also funded domestically - and the part that is not i.e. Chinese and other East Asian reserves invested in US GSecs is held for safety and not returns. Lastly, US being a single country can follow the policy of fiscal loosening to prop up demand - without say Nevada or California claiming that they are getting a raw deal in the process (which as a matter of fact some states might be getting - but nobody knows or analyses that). In Europe fiscall quasi independent governements do not want to "fund" some other country's "profligacy" and thus want to control fiscal loosening.

The crux of the matter is - how much will Germany succeed in fiscal austerity imposition before pushing through the fiscal integration. The balance - through inflation and currency depreciation - would be the effective funding the north europeans would have done for the south europeans.

Sunday, March 11, 2012

US Treasuries - the new cash!

The economist in a recent article has described the increasing use of US treasuries as cash by many investors. I have been thinking about the nature of money and wealth in general and have increasingly come to believe that this is not an oddity.

Some context first: I have argued in my earlier post, that the stock of global financial capital will keep growing at a very large pace. It is obvious to anyone that observes the workings of modern economies that a part of the cumulative savings in a given year get added to the investments of this year and leads to further increase in savings stocks - also termed wealth. I will write about the nature of wealth seperately later. It is interesting to note however that the rate of increase of savings stock is only going to go up as it benefits from the accumulation effect (something similar happens to stock of knowledge as well, though sadly there limits on human creativity soon start to block further progress!).

As the savings stock goes up, the investors are increasingly going to want to park it somewhere. While a part will go into the risky assets, a large proportion will nevertheless go into "safe assets". The safest asset of course is cash. However, there is not enough cash to hold the trillions of dollars of wealth in the world today. What is the next best thing? US treasuries.

If you observe carefully enough, you will realize that short of being accepted for exchange of goods and services (for now!), US treasuries resemble the ordinary US Dollar in many ways. They are both the obligation of the US government. They are both unsecured. They are both fairly liquid in terms of exchange value. And lately, thanks to QE, they both offer zero interest!

The similarities are neither superficial nor temporary. The world, as it turns out, does need something of the sort of "cash" to hold its wealth - which it does not wish to deploy into anything risky. If we revisit one of the reasons of mortgage backed securities becoming so popular, it is plain that the demand for safe assets is very high - large enough to prompt bankers to concoct artificial treasuries (As the safest tranche of the Mortgage Backed Securities).

As the demand for this cash goes up, the prospect of negative interest rate on US treasuries will become quite real. How is negative interest rate plausible? One goes back to the analogy of the locker. The locker is provided as a service and the owner of the locker is charging one for the safety assured. In a similar vein the US government is now looking to charge a premium for the safe keeping of the investors' funds that it assures (even with a AA+ rating! what a shame S&P?!).

How long will this go on? Probably for a long while. Even after the QE ends and the US as well as the world returns to moderate growth path, the demand for cash is not going anywhere - Sovereign wealth funds, pension funds, less optimistic common investors will all demand more and more of US treasuries over the time to come!

What does it mean? It means there is more financial wealth in the world than it needs. The US government is in essence a proxy for parking it with a safe enough borrower till the world sorts itself out. A shake-out like 2008 will repeat and cause some more reduction in paper wealth. However everyone wants to guard against losses in such a shake-out. Hence they will continue to park in the new-found cash till the mess concludes. The deeper issue is that the financial wealth will start diminishing slowly (through inflation as well as an explicit negative interest rate on treasuries if it arrives) even as everyone waits for the wealth reduction to conclude. But the massive ocean of liquid wealth that this will keep building will keep the financial world a very turbulent affair for a long time to come!

Thursday, February 16, 2012

A New Proposal for Entrepreneurs

Thinking, Slow and Fast is a remarkable book and I have written its review on a separate page on this blog. One of the very important implications of human biases the book refers to is the tendency of human beings to be overconfident as also to have conformity bias. The first one is easy to understand (even easier to prove - ask a group about how many of them think they are better than average drivers and you will typically get affirmative reply from far more than 50% of the population - a logical fallacy as in only half can be actually better than average!). The second one, stripped of its technicality, simply means that we like to seek and believe news, ideas, theories which conform with our views and ideas - if I think Dhoni has lost his form, I would pick up examples selectively which point to that; but using similarly biased selection of facts from the exactly same time period and matches played, someone else can prove her own bias that Dhoni has regained his form recently. Views matter even when - and probably most when - we watch and interpret news!

What's the connection with entrepreneurs? We will get to that soon enough! But before that, another very common aspect of overconfidence and conformity bias is the unwarrantedly high post-facto attribution of a firm's success to a man/woman's vision, charisma, grit or whatever else great leaders are touted to have. Fooled by Randomness (i just don't seem to be tired of quoting this book!) covers many instances of how random luck then gets covered by foresight some leader possessed and how people flock to interview him/her to understand the mantras of success. In reality luck does play a far larger role in any given individual's and company's "success" than most people - including leaders themselves - care to admit. However we are biased to favor a person-driven account of the greatness of the company and the randomness of the fate of individuals and companies is deeply unsettling for most of us to digest. Hence visionary halo to a successful leader is merely an act of completing what most of us would like to see anyway.

Coming back to entrepreneurs finally! It does not matter whether the big company CEO appreciates the role of luck in his/her success. Ultimately s/he goes home with a decent salary and perks even if the company does just ok. If it does very well, s/he goes home with much more and subsequently writes a book of generalities ("its about people!", "what's your moat?", "its about cashflows!", "its not about cashflows!" and such). For an entrepreneur, life is not as forgiving (I am speaking from personal experience). If you get it wrong, you wrap things up and go home. If you get it right, you are a hero. Numerous entrepreneurs understand and appreciate this - very well infact. They dont mind the odds and the experience is anyway rather enriching. However, the fate of the unsuccessful entrepreneur need not be becoming part of what Daniel Kahneman calls "The Engine of Capitalism" - i.e. successful or failed, an enterprise pushes forward the growth of the economy in its own way.

Entrepreneurs are by design (and self-selection) overconfident (again, been there!!) How can a rational and cool-thinking (and yet overconfident) entrepreneur account for this in her plans? I would propose the following (finally!)
Build to maintain a steady positive cash flow through a long period of time. Which means keep costs modest and revenue steady even if low. A priori one does not know which of the various small opportunities is the big break. Hence the prudent thing would be to maximize the number of such opportunities while not betting on any one with everyone one has got. Even something looks very very promising (which can't be all of the opportunities!) it is best to find a partner who can share risks and rewards of that specific opportunities. Then in exchange for the downside protection one gives up share (even if large) of the upside. This ensures that the enterprise has multiple shots at the big break. Post facto such a strategy would look stupid if things work out on that one nondescript idea. But then a priori one did not know which that one idea would be. One can even use the proceeds of the modest gains one would have made from this (owing to having given up much of the upside) to create even more breathing space to take on larger piece of the next few promising opportunities.
What's the trade-off? Well, like a VC firm one would like to try out a small number of highly promising but nascent ideas. But keeping that number at one, a la the conventional entrepreneurs, is to really try to take statistics head on!
What's the downside? For something like a potential google or facebook, in terms of the financial upside lost, its not much (in relative terms, not absolute). For a moderately successful enterprise, one is likely to feel some heartburn for not having taken that leap of faith, but it is still a high quality problem. For failed ventures, it is much better to have not risked the firm's existence on them - even post facto!!

Saturday, January 07, 2012

Tidier than thou!!

One of the most profound ideas in the book i am reading currently (Thinking, Slow and Fast by Daniel Kahneman) is that we - humans - are hardwired to think of our world to be more coherent and tidy than it really is. That got me thinking.

We are forever looking for "explanations" and "causal" connections where there might be none. We are always looking for the proverbial "why" - which is undeniably at the root of all knowledge (and much hokum as well) but is also the cause of our oversimplification of the world. I have written in an earlier blog about the human obsession with easy generalities. Kahneman also observes the same theme and attributes most of it to (surprise, surprise) evolutionary forces. I agree with him. It can be easily demonstrated in a simulation or a controlled experiment that in conditions similar to those in the early human society (or actually even in proto-human era) the individuals which are inclined to find patterns and causalities are more likely to survive than those who are clearer in their understanding of the world but also by the virtue of that remain rather confused in general. It is better from a survival and progress point of view that one creates a questionable theory and then is guided by it than being directionless because of acknowledging the inherent complexity of the world and thus the unlikelihood of a given theory being accurate.

But progress and activity aside, this tendency to generalize and rationalize has also meant that we have an over-coherent model of the world. We see patterns where none exist and we see cause and effect where chance prevails.

That leads me into another scarier direction. It is believed in general that the natural sciences like physics and chemistry have a rather solid understanding of their domain while humanities and social sciences are lot less exact. This is based on the belief that natural world "follows" order and is governed by "laws" which may not be fully known to us but are "out there". If you look deeper however you would realize two things.
1. For one, our laws of nature picture does not really explain much. As a thought experiment if you freeze the world around you for a second and try to predict what happens next (in the physical non-living world) given the current state of the world, you will realize what i am referring to. Sure you can predict that things without support will fall and broken things wont reattach by themselves. But very soon you run out of laws-driven explanation of all occurances and most things thereafter are explained as "random" (a more accurate description of this is "random symmetry breaking" - beautifully explained in the book "Theories of Everything" by John D Barrow.)
Even at the cosmic or microscopic level, the laws-explained portion is limited. Much is explained (or "explained") by randomness. Its not even that we dont know those laws yet. We have acknowledged that these are not lawful occurances. They are just random.
So yes, we are far more evolved vis-a-vis our ancestors who thought sun went around earth (which by the way is not technically inaccurate in the post-relativity world!) but we are far from knowing how the world works. At best we have a decent handle on recurring patterns in interaction within the physical world. We call these laws of nature.
2. Secondly, what we might be overgeneralizing as laws can simply be transient patterns in this specific space-time coordinate set. These might be patterns mined out of data available to us. There might not be a Plank's constant out there. It might simply be that the way things are in recent years (millenia, billions of years whatever) can be modeled as if they had a constant like that.
Which can then hold for laws of nature in general. These are our constructs - and are far more stable than anything we have seen in the rest of the world, but are simply far slower to change, maybe at this time. In another time and another location in space, even the rate of change of these might be much higher. There if some sentient beings were out with their telescopes and microscopes they might end up with an entirely different set of laws because some other patterns are constant there.

Using Occam's razor is it not more sensible to believe that there are really no "laws" but simply a spectrum of less or more stable patterns - the most stable being labled "laws"?

Is there a todo here? Probably not. This is more of a realization if you will. Not very disturbing also if you realize that it does not change anything in the material sense per se. But it is definitely a more humble approach to understanding our world than attributing fancy "laws" to it!

And generalizing from the natural sciences to all human endeavours, i would state that dogma is intellectual paralysis and end of the road for building knowledge. In this sense, Friedman while stating that "inflation everywhere and always a monetary phenomenon" is no better than 17th century Church that gagged Galileo! In the true quest for knowledge, the least we can do is remain tentative - always!!