Over Complex and Under Empirical: What To Do About Finance?

The barbarous gold barons. They did not find the gold. They did not mine the gold. They did not mill the gold. But by some weird alchemy all the gold belonged to them. 

— Big Bill Heywood, an American industrial unionist

I can calculate the movement of the stars, but not the madness of men.

—  Isaac Newton in 1720, after losing his fortune in a market bubble 

“What are three quick ways to become a leader [in finance]? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.”

Greg Smith, resigned Goldman Sachs executive director and head of the firm’s United States equity derivatives business in Europe, the Middle East and Africa.


The toughest books I have tried to read are The Road To Reality: A Complete Guide to the Laws of the Universe, and Godel, Escher, Bach: A Golden Braid, and The Financial TimesGuide to Investing, and The Economist’s Guide To Markets. To be fair the first two do a good job of explaining what amounts to the astonishingly complex. Whereas these finance books barely use human language; they are jargon from start to finish. In an ultimate test of how inhuman the language is, try reading them aloud or listening to them be read aloud; no one talks like that. Whereas some people do talk like Roger Penrose and Douglas Hofstadter. I lack the understanding of the jargon. That makes me feel left out and attempts to translate these guides into human language give me an eccentric hobby. But this hobby got me asking bigger questions about finance and financial-economics: why are finance and specifically financial economics so hard to grasp? Is it because it just is complex, like mathematics, physics, and artificial intelligence are or because it is made over-complex for political reasons? 

After all, corporate law that (mis)justified colonsing India was ‘complex’ (Stern, 2015) and ‘convoluted’, but corporate law and its rules were evidently complex to maintain colonialism rather than because it had to be, or had most justification in being so. For a neater and less fraught example, consider relativity. Relativity is complex, and people have managed to explain it in ways I somewhat understand. Bertrand Russell, for example, in the ABC of Relativity. Other complex topics like evolutionary biology, calculus, and physics fundamentals can actually be explained empirically and make sense, for instance in The Structure of Evolutionary Theory, Infinite Powers, and Richard Feynman’s Six Easy Pieces selection and lineages, video animation, gravitational positioning systems, and fluid movements and energy exchange are explained in reference to what I can observe, challenge, and verify. But that is not so in finance. Why? The story goes that because financial knowledge requires massive amounts of maths, quantitative modeling, and super forecaster predictions, finance is just too hard to explain in simple terms. But relativity and AI and evolutionary biology somehow are.

I contend that finance is far from necessarily complex. On the contrary, people who benefit from finance and economics who constitute the financial world, benefit from maintaining that complexity and the aura of mathematically-armored authority and neutrality that accompanies it (R. Porter & Ross, 2003; T. M. Porter, 1996). The fact that finance and orthodox economics is anti-empirical and exclusive is, I uphold, to blame for finance and abstruse economics being, in communications anyway, more confusing than evolutionary biology, artificial intelligence, or basic physics. 

On the one hand, financiers and economists make incredibly complex models for market behaviours and give names to those patterns down to the minutiae. And on the other hand, financiers and economists simplify the complex world and markets into a set of workable models they can apply again and again. And financiers and economists for the most part celebrate that. As the economist, Dani Rodrik claims “economic models are relevant and teach us about the world because they are simple”(Rodrik, 2015, p. 44). Rodrik goes on to say that simplifying away assumptions about smoothness and so on in physics allows for an experiment—like a ball rolling down a plank at a certain velocity—to work—and the same thing goes on, he says, in economics. The accumulation of models, he says, makes economics a science. 

But whereas in physics observations inspire theories that inspire observations, there are obviously more theories than empirically derived observations in economics. For some examples, consider the history of economic policies such as the disavowal of Keynesian spending, the embrace of the laffer curve, and widely and bizarrely held beliefs that minimum wages harm productivity (Bergin, 2021; Krugman, 2020) despite empirical studies and historic experience falsifying them time-and-again. A better albeit brief definition of science is not model-collecting, as Rodrik upholds, but suggesting-and-testing hypotheses and updating to fix mistakes (Popper, 1963). As economist William Lazonick writes, “I contend that the conventional economic perspective on how the capitalist economy functions and performs imbues the economist with a trained incapacity (to borrow a phrase from Thorstein Veblen) to comprehend the relation between resource allocation and economic performance in the actual economy” (Michael Jacobs & Mariana Mazzucato, 2016). As Upton Sinclair observed: “it is difficult to get a man to understand something when his salary depends on his not understanding it”. In some sense, getting financiers and orthodox economists on board with reform is a bit like getting coal miners to celebrate clean technology, despite reform and clean technology being good for everyone, such as breathing cleaner non-carcinogenic air when near cars, for example.

As it stands, finance makes the world too complex; economics makes the world too simple. Hence economics students are rebelling against the lack of evidence and utility in economics (Chang, 2011, 2014b) that struggles to even explain boom-and-bust. Neither overcomplicated nor oversimplified approach helps explain quality finance or quality economics, including the removal of bad ideas, bad policies, and bad products. For example, explaining all the financial products in circulation today would take too long, Cambridge economist Ha Joon Chang says—years even beyond their financial cycle (Chang, 2014a)—and many of the people trading them barely grasp what they are doing themselves. Some research has shown that traders perform worse than random in their dealings. As the economics Nobel laureate Daniel Kahneman (2011) contends in Thinking Fast and Slow:

For a large majority of fund managers, the selection of stocks is more like rolling dice than like playing poker. Typically at least two out of three mutual funds underperform the overall market in any given year… The successful funds in any given year are mostly lucky; they have a good roll of the dice.

Daniel Kahneman, Thinking Fast and Slow

A paper he cites shows that for most investors, the stocks they chose to replace did better than those they bought; implying that their work actually was counterproductive in gaining returns (Barber & Odean, 2000). In other words, to earn more it would have been better to have done nothing at all. So the idea that they merit the reward through skill or knowledge is questionable. 

The idea, too, that all the complexity of models leads to rigour and more understanding is misplaced. Because even insider practitioners never know the mechanics at play and even have delusional beliefs in patterns of investment that are actually down to chaos rather than order; on the average of course. Some do better than random but likewise, some do worse. Orthodox economists meanwhile assume assumptions and models to make the world more manageable, such as assuming barter relationships and power-dynamics to be win-win, and economic efficiency to be a trade-off with inequality (Rodrik, 2015; Sowell, 2011). When in reality, the majority of human history had no markets as we know them; city-scale societies were financially and economically equal in some circumstances and relations of slavery and indebted labour flounders assumptions of non-zero sum games in voluntary transactions, as voluntary transactions for some are losses and involuntary for others—such as present-day slaves, disenfrenchesied women, or the misemployed (Federici, 2004; Graeber, 2012; Graeber & Wengrow, 2021) that in real-world numbers have more bearing on questions about human nature and humans’ societies than do financial or game-theory models that feature in economics textbooks.

No more is the lack of empiricist finance evident than in financial portfolios that profit from harming the environment simply because costs—such as environmental degradation—are not added to their financial equations because economics’ models simply omit aspects of the real world (Helm, 2019; Raworth, 2017). The work of environmental economists notwithstanding, green capital and natural capital are making slow inroads. As the Chicago-school economist Robert Coase, noted in a Harvard Business Review article named Saving Economics From The Economists:

In the 20th century, economics consolidated as a profession; economists could afford to write exclusively for one another. At the same time, the field experienced a paradigm shift, gradually identifying itself as a theoretical approach of economisation and giving up the real-world economy as its subject matter. Today, production is marginalised in economics, and the paradigmatic question is a rather static one of resource allocation. The tools used by economists to analyse business firms are too abstract and speculative to offer any guidance to entrepreneurs and managers in their constant struggle to bring novel products to consumers at low cost.

The real world economy features less in orthodox economics and is only comprehensively recognised among economists who are dedicated to how value is co-created through production and consumption. Marianna Mazzucato (Mazzucato, 2018) details how value is actually made, taken, and circulated through the economy: contrary to creating value, most of finance is orientated towards circulating and, in some cases, taking value from the real—meaning productive—economy. Until 1970, for instance, finance never featured in gross domestic product (GDP) accounts as those in power deemed finance an intermediary (Mazzucato, 2018). So, the value of the financial sector is disputable. Especially given the GDP growth leaps in the 1960s.

Moreover, the mega-star investor Warren Buffet—worth 110.5 billion USD in 2022—concedes how value is shared by saying he supports high-taxes. Because his success entirely depends on a fortunate and socially funded environment: “If you stick me down in the middle of Bangladesh or Peru,” he said, “you’ll find out how much this talent is going to produce in the wrong kind of soil.” Buffett thinks it wrong, and unjustified, that he pays less tax than his secretary who “works just as hard as me”. (There is even an odd video about his surprise over his secretary’s tax rate.) Herbert Simon meanwhile credited that most capital is social capital rather than personally or privately created, it is shared rather than owned per se. “On moral grounds,” he elaborated (UBI and the Flat Tax, 2014) “we could argue for a flat income tax of 90 percent”. As a matter of fact merit-based financialised reward actually misreads cause-and-effect, as Buffett’s counterfactual story about failing in another environment suggests, and the actual history of economic growth and transformation attests (Jacobs and Mazzucato 2017).

Arguably, the reason for finance being over-complex is simply because it is under-empirical: instead of representing or analysing the world, the mechanics of finance create maps for it that feed off the circulation, resells and repurchases of other maps. Rather than contributing to the real economy and changing the material conditions for citizens it, moreover, empowers 1-in-100 to own more than 99-in-100 (Raworth, 2017). The guardrails of finance and abstruse economies are not the product of hard science but of concerted politics whereby a few benefit at the loss of many, in the dominant narratives that pass for authoritative policy interventions for which the language of finance is required to be taken seriously. This disjuncture is strange since finance depends on the state. As is evident in how risks are socialised whilst rewards are privatised, in shareholders earning returns and banks risking failure on the premise that taxpayers’ purses and the authority vested in government will always bail them out; despite such banks seldom straightforwardly creating value in the indisputable manner that vaccines or drug makers or health services do.

So, what to do with finance? To best serve the creation of value, limiting finance and reprioritising manufacturer and jobs matters. On the path to that, removing quantitative products should be on the agenda. Whilst numbers have historically given an aura of authority, it is an authority handed to those who wield models, rather than authority stemming from the maths itself or even reliable predictions. The history of statistics makes clear how the trust we have been taught to place in numbers comes from a conflation between numbers and objectivity (T. M. Porter, 1996) or numbers and science. As we have explored here, that is but an illusion in finance and many of the assumptions and models of orthodox economics. Simplifying finance has the benefit of actually dedicating finance to meaningful endeavours rather than rent-extractive practises, see for example, (Mazzucato & Penna, 2015)) so is well worth the legislative endeavour. As the history of finance makes clear, in GDP not featuring the financial sector until 1970, and the over-complex products invented in the 2000s (before the crash) finance for all its complexity is far from immutable, and even requires simplification and empiricism to ensure it serves the aim of enriching, rather than taking from, the economy.


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