By Daniel Cloud, Ph.D.

“The cost of dishonesty, therefore, is not only the amount by which the purchaser is cheated; the cost must also include the loss incurred from driving legitimate business out of existence.”
       George Akerlof, The Market for Lemons

People have begun to worry that we’re experiencing a crisis of confidence in our traditionally most prestigious institutions - in our political parties, and central banks, and great newspapers, and universities, and even in accredited experts.

Views that would have been regarded as extreme in the past also seem much more common now. The entire political spectrum, all around the world, seems to be in the middle of collapsing into a collection of smaller, more radical groups. Some of them advocate violence.

The problem doesn’t seem to be unique to this particular historical moment. There are other times in recent history – the 1930’s, perhaps, or the 1960’s – when the public seemed equally unhappy with existing institutional points of view. Like the present, they were periods of relatively rapid change in organizational and communications technology.

The underlying problem is, I think, a very strange one. But it’s a risk faced by any society that both undergoes rapid technological change, and contains organized interest groups. (Formal or informal.) Something really bad is happening to all our bullshit. In fact, I’ve begun to worry that there’s actually a sort of crash or cascading failure going on in the bullshit market. If there is, I think it’s driven, as previous bullshit crashes were, by changing technology.

This may seem like an odd thing to worry about. But it’s actually a very natural worry, if you have any interest at all in recent American philosophy and/or the economics of informational externalities.

Since the time of Socrates and Plato, humans have pondered the origin of our words. Now we're closer to an answer. 

By Daniel Cloud, Ph.D.

How did all the various things in the world get their names?

And out of the ground the LORD God formed every beast of the field, and every fowl of the air; and brought them unto Adam to see what he would call them: and whatsoever Adam called every living creature, that was the name thereof. (Genesis 2:19)

That’s one theory. Who stands behind the lexicographers, or the teachers, and whose laws are they enforcing when they insist that we use words “correctly” rather than “incorrectly”? Perhaps all the meanings were decreed by Adam himself, the ultimate ancestor, in a single original act of baptism. And perhaps our job, as philosophers, is to re-create that original mother tongue or universal character, and rescue humankind from its long captivity in Babel.

Perhaps those things are true, but it sounds like a fairy tale. Our lan­guages are part of our inherited culture, and it now seems wrong to think of our own cultural conventions as the decayed remnants of an ancient dialogue between the first man and God. As philosophers work­ing in a tradition that has often been preoccupied with language, we ought to be able to come up with a better story. So it should come as no surprise that a number of philosophers, ancient and modern, have tried to account for the origins of language in a more convincing way.

Plato made one of the earliest attempts in Cratylus. His way of posing this question has been influential—the quotation from W. V. Quine that serves as the epigraph to this book is one echo of it, as we’ll soon see. Aside from the suggestion made by Hermogenes, in the dialogue, that our language must be a system of arbitrary conventions, however, most of his tentative proposals concerning its possible answers seem to have struck modern philosophers as implausible.

But implausibility isn’t always a defect. Sometimes a very alien way of looking at a problem offers us exactly the new perspective we need. Plato was not naive or foolish. In Cratylus, starting with very different assumptions, he made some suggestions about where the meanings of words come from that we now find surprising.Are they all just bad ideas, in spite of their source? Or could some of them be hidden treasures, insights that look unpromising simply because they’re so unfamiliar?

Here I want to revive in a more contemporary form what seems superficially to be one of the least plausible of those ideas. Socrates is depicted as believing that the words of our existing languages were cre­ated by people he calls nomothetes, lawgivers or legislators. Although Quine called this idea childish, to Plato it apparently seemed obvious. Since neither of them actually knew where the meanings of words came from, this is purely a difference of intuition between two great philoso­phers, one ancient and one modern. That alone should make us curious.

By Daniel Cloud, Ph.D.

“What, then, is time?” Saint Augustine asks in the Confessions. “If no one asks me, I know, but if I try to explain it, I don’t know.” It’s a keen observation, because we’ve all had this experience. Still, it’s a rather peculiar state of affairs that’s being described. Did Augustine know what time is, or didn’t he? If he did know, why couldn’t he say what it is? If he didn’t, how could he go around using the word?

But the oddest thing of all is that Augustine then does go on to produce a philosophical analysis of his own concept of time that’s incredibly revealing, one that has been very influential ever since. If he knew all that just by knowing the meaning of the word, why couldn’t he say it in the beginning, why did he have to do so much work to know what he’d meant by the word all along? How can this procedure, the careful analysis of our own culturally acquired notions about the meaning of some word in ordinary language, possibly produce knowledge about the real universe, about a physical thing like time?

And yet… the process of lifting ourselves by our own bootstraps had to start somewhere. Historically, it really does look as if the philosophical analysis of ordinary language and ordinary ideas about time and space and causation and chance and knowledge and logic and evidence has played a role. It really looks as if Empedocles and Plato and Aristotle made some sort of contribution to making the existence of Euclid and Ptolemy and Newton and Darwin possible, though it’s very unclear what that contribution was.

By Daniel Cloud, Ph.D

The ruble has already lost almost half its value against the U.S. dollar this year, and its potential collapse has pushed Russian President Vladimir Putin into an increasingly tight corner. In Ukraine, where hostilities have brought sanctions and alienated investors, Putin has only bad options to choose from: He can either make a deal now—one he won’t like, since he holds few cards—or compromise later, once his negotiating position has deteriorated further. No matter what happens, he will end up badly wounded. The question is whether he will drag his country down with him, turning Russia into a full-fledged pariah state.

By Daniel Cloud, Ph.D.

Why do people have sex the way they do? There are lots of puzzling things about that, but three really stand out. Sex between two chimpanzees takes a few seconds, but sex between humans can take hours. Why are we so different from them? Men can only have a few orgasms, but women can have lots of orgasms, separated by long intervals of high arousal. Why are we so different from each other? And finally, surveys done by people like Shere Hite and Alfred Kinsey have consistently shown that intercourse isn't really the easiest way for many women to have an orgasm. [3] Oral sex and masturbation often work better. But why wouldn't the activity that leads to fertilization be the most reliably pleasurable one? And why do we humans engage in so many other sexual activities, from anal sex to zoophilia, that also have nothing to do with reproduction?

To answer these questions, we'd need to know how our human way of having sex evolved. But there's no generally accepted theory. Ten years ago, Elizabeth Lloyd's explanation of the female orgasm looked pretty plausible [5]. She argued that women can have many orgasms simply because there never was any reason for a limit to evolve. They have nothing to do with reproduction. They're just an evolutionary accident.

But our story about human evolution has changed since then. Now that the idea of cultural learning has become more central to that story, does sex look any different?

I could be wrong about this, but Lloyd's "evolutionary accident" theory doesn't really seem right to me anymore. Instead, I'm starting to suspect that the multiple orgasm may have helped make us what we are today. If people everywhere really understood why humans have sex the way they do, if they really understood the competitive obstacle course Nature has laid out for them, I think they might be happier themselves, and more useful to their partners.

By Daniel Cloud, Ph.D.

What is life? The Von Neumann machine is a persuasive model, but examples are given of things that behave like Von Neumann machines despite being obviously not alive. One such example is crystals; it would be good to have an abstract model of bio-molecules in general that was as explanatory as our abstract models of crystals are. It is proposed here that a class of mathematical objects called Wang tilings can play that role, and some of the implications of this model are developed through a comparison between the structures of a crystal of water ice and a folded RNA molecule.

It’s hard for a curious person to look at a blade of grass, or a baby, or a bacterium, and not be astonished by the very fact of its existence. Why should there be any such wildly improbable phenomenon? Why isn’t the green, changing Earth more like the pale static Moon, where things just sit there stably being ‘things’? What is it about the way nature is set up that made this strange and complicated class of objects, all of them somehow ‘life’, burst forth spontaneously from the sublunary muck? And just what exactly is life?

For the last four or five decades, the answer almost any serious biologist would have given to this question is John Von Neumann’s; a living thing is essentially a naturally arising self-replicating machine. Von Neumann himself only intended this simple formulation as a starting point for an inquiry into more subtle aspects of the phenomenon (for example, is DNA or some other similar memory molecule really necessary, or could there be living things with no genome at all?) but his untimely death meant that the world got his biological work in an unfinished form, and what is remembered now is the snappy and persuasive formulation he started it with.

By Daniel Cloud, Ph.D.

I liked our present method of valuing options pretty well right up until the moment when it was finally time to put some of my own hard-earned money at risk by selling one. I could still understand the logic of the mathematical argument, but somehow the idea of selling an uncovered call, or even an incompletely covered call, myself, just seemed crazy to me. There are ideas we can advocate in public without looking foolish, and then there are ideas we would really act on in private, even if nobody else could see what we were doing. Somehow it suddenly seemed to me, then, that Black-Scholes, like so much of the rest of modern finance theory, actually belonged in the first category but not the second.

What I want to talk about here is what I would really do instead of just using Black-Scholes in its present form, and why. The question that interests me is a practical one about how you or I, as prudent people, ought to actually account for the actual options that we might actually buy or sell some day soon. I’m going to confess to you how I, personally, would do things, and try to rationally justify my own choices, which I admit is not as good as giving you a scientific theory that spits out a precise numerical value as the absolute, eternal, observer-independent, peer-reviewed truth. But, after all, my subject is a mere accounting rule, and Aristotle tells us that we ought to treat each subject with the degree of precision it deserves, so perhaps there’s even something principled about my refusal to claim to be doing hard, objective science.

What is it, intuitively, that seems so wrong about Black-Scholes? Any reasonably cautious person who sees the way options are promoted to small investors on CNBC can’t help but be bothered by the fact that our present theory of option valuation presents the risks of buying options and the risks associated with selling them as being exactly the same, even though one activity involves only a limited possible loss, while the potential losses from the other are unlimited.

Continue reading "How Options Should Be Valued" by Daniel Cloud, Ph.D. 

By Daniel Cloud, Ph.D

I believe that Shinzo Abe has made a very serious strategic miscalculation. I used to be confused in much the same way he now seems to be, but I was cured of my confusion by thinking about Chinese inflation.

For a long time, I was puzzled by the fact that America’s endless multi-stage QE program seemed to have no effect on measured inflation, on the CPI and the PPI. But then I realized that by only looking at the United States and their three hundred million-plus people, I was missing the big picture, missing the most important part of its aggregate impact on the Earth’s seven billion inhabitants.

QE may never have much of an effect on the inflation rate in the fifty states of the United States of America, because it is workers in the developing world, and in particular, in China, who are the marginal hires in our still-globalizing, still-offshoring world economy. There is no distinct American economy, now, there is no Chinese economy, there is only the world economy, and the Fed makes policy for large parts of it. China has the kinds of structural rigidities in its labor, goods, information, and asset markets that make inflationary psychology very probable. It already had an ongoing and stubborn problem with inflation before QE started, so the required psychology already existed. And, perhaps most importantly, much of the money the Fed is printing doesn’t actually end up in the United States. It ends up being added to the reserves, and therefore the domestic money supply, of countries like China, who want to keep their currencies pegged, or quasi-pegged, to the dollar.

By Daniel Cloud, Ph.D.

Analysts who’ve only started paying attention to the country in the last decade often seem convinced that China has no real business cycle, or a very mild one, that because its economy is centrally planned, it’s free from the fluctuations in investment that cause booms and recessions in countries that lack the scientific guidance of a Leninist single-party state. This convenient belief, however, is mostly an artifact of the period over which they’ve been observing its economy.

In what’s generally, since at least the 1950’s, been a short, very high-amplitude cycle with a roughly seven year period, the period between 1992 or 1993 and 2007 or 2008 is unique. It has a “soft landing” (or as DeWeaver calls it, a “long landing”) in its middle that was unlike any other slowdown China has experienced in its post-World-War II economic history. The boom of the early 1990’s wasn’t followed by the usual bust. Instead, after a fairly mild slowdown, another boom period began towards the end of the decade, without the usual deep cyclical trough between expansions.

DeWeaver’s explanation of this anomaly suggests that it is unlikely to be repeated. We’re probably living, now, with a China that’s back to the sort of violent swings in economic activity, and repeated struggles with inflation, that have been characteristic of most of its recent history. To understand why, it’s necessary to understand his explanation of the nature of the cycle itself.

Click here to read the entire article "China's Broken Shock Absorber" on ZeroHedge.com

By Daniel Cloud, Ph.D.

In some ways, a cell is like a large, noisy, neural net. Molecules, or segments of molecules – genes, transcription factors, and the rest of the cell’s regulatory apparatus – act as nodes in the network. Interactions between molecules can be thought of as connections between the nodes. The propensity of a pair of molecules to interact can be identified with the weight of a connection. The pattern of response of a gene to the binding of a transcription factor seems analogous to the response function of a node. Either thing could in principle be modeled, somewhat imperfectly, with a huge, interconnected system of stochastic differential equations.

This mathematician’s way of looking at cells – a direct intellectual descendant of Stuart Kauffman’s original ‘random Boolean network’ model of gene regulation – makes them seem rather like complex analog computers. And yet many biologists – including Kauffman himself – are skeptical of this further step. Are cells really just ‘processing information’? Are computers really a good model for cells? Isn’t life something rather different from computation? When we make this sort of idealized mathematical model, aren’t we greatly oversimplifying what is, in reality, a very complex physical system? Is the information, as opposed to the molecules we mentally associate it with, really there at all?

Continue reading "Biological Information and Natural Selection" by Daniel Cloud, Ph.D. 

By Daniel Cloud, Ph.D.

Some people in Asia burn joss paper, also called ghost money, on the Lunar New Year, to give their deceased ancestors something to spend in the afterlife. Because ghost money doesn’t represent a claim on any actual goods or services in this world, there is no reason for its issuers to exercise any particular restraint, and in Singapore it is possible to find notes issued by the First Bank of Hell, with the mythical Jade Emperor’s picture on the front, in denominations ranging into the millions and billions of dollars. Perhaps we’re counting on this charming tradition to make Asian investors comfortable with the prospect of continuing to add to their holdings of European and American sovereign debt, despite the obvious fact that the money they’ve already lent us is money they’ll never get a chance to spend in this life.

We, in the West, all think seem to think that a sovereign debt crisis is a problem that can be deferred for a few years. We aren’t going to default or inflate quite yet, not for a little while still, and we think our creditors should be as insouciantly untroubled about what might happen a little later on as we are. To anyone, like China’s central bank, who is irrevocably committed to holding large amounts of our sovereign and quasi-sovereign debt to maturity, however, default or restructuring in ‘a few years’ is default or restructuring that will occur while he is still holding many of the same bonds he has now. It is money he has already lent us that will not end up being repaid.

We aren’t even trying very hard to pretend that we intend to pay it. We’re more or less at the point of no return now, yet a comprehensive reform of Medicare, Medicaid and Social Security, the only thing that could save the US from eventually defaulting on our obligations, is on absolutely nobody’s political agenda, and by design won’t be until after the crisis happens. The people who manage China’s reserves aren’t stupid. They do read the newspaper. If they know, now, that we are headed for effective default or restructuring in a few years, they should write the bonds down now. But if they are worth less, now, than they are trading for, why would they go on buying more of them? How could they? For them, the sovereign debt crisis is already happening. Every day, they have to decide whether to keep on throwing good money after bad, or lose everything right away.

Click here to read the entire article "Ghost Money" on ZeroHedge.com

By Daniel Cloud, Ph.D.

To understand how we got ourselves into our current economic mess, complicated explanations about derivatives, regulatory failure, and so on are beside the point. The best answer is both ancient and simple: hubris.

In modern mathematical economics, many people in the rich world decided that we had finally devised a set of scientific tools that could really predict human behavior. These tools were supposed to be as reliable as those used in engineering. Having ushered scientific socialism into its grave at the Cold War’s end, we quickly found ourselves embracing another Science of Man.

Our new beliefs did not stem from some new experiment or unexpected observation, the way a real scientific paradigm shift does. Economists do not typically conduct experiments with real money. When they do, as when the Nobel laureate Myron Scholes ran the hedge fund Long Term Capital Management (LTCM), the dangers often outweigh the benefits (a lesson we still don’t seem to have learned.) And, since almost every observation that economists make turns out in a way that wasn’t predicted, no unexpected observation could ever actually change an economic paradigm.

Click here to read the entire article "Scientific Capitalism" on Project-Syndicate.org

By Daniel Cloud, Ph.D. with M. Andrecut and Stuart A. Kauffman

Monte Carlo simulations of a genetic toggle switch show that its behavior can be more complex than analytic models would suggest. We show here that as a result of the interplay between frequent and infrequent reaction events, such a switch can have more stable states than an analytic model would predict, and that the number and character of these states depend to a large extent on the propensity of transcription factors to bind to and dissociate from promoters. The effects of gene duplications differ even more; in analytic models, these seem to result in the disappearance of bi-stability and thus a loss of the switching function, but a Monte Carlo simulation shows that they can result in the appearance of new stable states without the loss of old ones, and thus in an increase of the complexity of the switch's behavior which may facilitate the evolution of new cellular functions. These differences are of interest with respect to the evolution of gene networks, particularly in clonal lines of cancer cells, where the duplication of active genes is an extremely common event, and often seems to result in the appearance of viable new cellular phenotypes.

Click here to read the entire article "Monte Carlo Simulation of a Simple Gene Network Yields New Evolutionary Insights" in the Journal of Theoretical Biology