November 29th, 2012 § 0 comments

Today’s picture is rather a break from the classics

And if (owing to enlargement) you can’t read it very clearly, it hardly matters. It’s the picture of David X. Li’s mathematical formula, the ‘Li Copula’, aka ‘The Formula that Killed Wall Street’, as it was titled in Wired magazine (2009). David, as you might expect, is Chinese by origin; he currently works in Beijing. So let’s begin by recalling a classic Chinese rule:

‘Where do correct ideas come from? Do they drop from the skies? No. Are they innate in the mind? No. They come from social practice and from it alone. They come from three kinds of social practice: the struggle for production, the class struggle and scientific experiment.’ (Mao Zedong, ‘Where do Correct Ideas Come From?’, 1963)

Tang dynasty vase

And, for a different angle, consider this (translated) Tang dynasty poem; from Ezra Pound’s ‘Cathay’ (1915), credited to ‘Rihaku’, the Japanese name for Li Bai (8th cent. CE), as he seems to be usually called.

The River-Merchant’s Wife: A Letter

While my hair was still cut straight across my forehead
I played about the front gate, pulling flowers.
You came by on bamboo stilts, playing horse,
You walked about my seat, playing with blue plums.
And we went on living in the village of Chōkan:
Two small people, without dislike or suspicion.
At fourteen I married My Lord you.
I never laughed, being bashful.
Lowering my head, I looked at the wall.
Called to, a thousand times, I never looked back.
At fifteen I stopped scowling,
I desired my dust to be mingled with yours
Forever and forever, and forever.
Why should I climb the look out?
At sixteen you departed
You went into far Ku-tō-en, by the river of swirling eddies,
And you have been gone five months.
The monkeys make sorrowful noise overhead.
You dragged your feet when you went out.
By the gate now, the moss is grown, the different mosses,
Too deep to clear them away!
The leaves fall early this autumn, in wind.
The paired butterflies are already yellow with August
Over the grass in the West garden;
They hurt me.
I grow older.
If you are coming down through the narrows of the river Kiang,
Please let me know beforehand,
And I will come out to meet you
                        As far as Chō-fū-Sa.
Having skipped through Li Bai, Mao and David Li (omitting Martin Jacques’ views on where China is going, sorry), let’s return to the mathematical core. Was the 2008 crash caused by a formula? Of course not, is the quick answer; it was caused by human greed, corruption and stupidity. What has mathematics got to do with them?
That is, of course, an excellent question, and it would take more time than I’ve room for right here to answer it. But it’s worth pondering. If you remember that far back, what happened in 2008 was that all the major banks had most of their assets in things which were not value – which as Marx, Mao and I agree is produced by human labour – but ‘pools of debts’ (I quote from Forbes). You may also know this stuff as ‘structured credit’, or ‘credit default swaps’… If you own (say) a million dollars worth of these, you own a million dollars of promissory notes; clearly you’re all right if enough of them pay up, or don’t default.
Mortgage companies used to form part of the market; you saved up in them until you had a deposit, you earned from your wages, you met the payments – remember? A credit default swap is more like a bet that someone (or a whole load of people) who borrowed won’t default. How do you value these? This suddenly became an important question when the market went crazy to buy them.
Li’s formula was a way of pricing these ‘instruments’, based on the likelihood of several debtors defaulting at once. As anyone can imagine, in a reasonable statistical world, it’s unlikely that everyone will default at once, and that gave a handy pricing mechanism for CDSs; they were bought and sold, and banks accumulated masses of them.
And then a huge number of mortgages defaulted at once, and of course the banks panicked, and none of the formulae worked. There’s a scholarly exposition of the problem which I’ve skated over above, by a respected sociologist of science, Donald Mackenzie.
Finally – not Chinese, but at least some ‘Orientalism’ Lotte Lenya’s ‘Surabaya Johnny

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