It’s a fantasy that society could be self-regulating machine if men were free to pursue their self interest. Gee, we tried that, and in pursuing their self-interest men naturally do each other dirt (force and fraud) and form coalitions with stronger men rather than trying to be warlords, or corporate executives, on their own.

N-person game theory has multiple winners but only by virtue of some players accepting a partial win in doing the bidding of more successful players.

Therefore, society needs a super-ego in the form of a common understanding of fairness and decency. Omigosh that’s a liberal government.

But one reason I left the programming business, Dan, after working with you on the cult classic “Build Your Own .Net Language and Compiler” was because working as a programmer, at whatever level, one finds that if one ever speaks or writes on the Internet to the left of corporate free market ideology, one takes a hit at performance review time, since programmers just aren’t all that important enough to be allowed to have left-wing opinions.

Instead they are allowed to float to the right of corporate free-market liberalism in the dark seas of libertarian fantasy, and moan and groan that we need unregulated private currencies and Ron Paul, and everything would be just great.

Thank god I am both a good teacher and a heckofa telemarketer (I like bothering people on the phone as you may know) as well as an ace programmer and excellent if digressive computer author, since the price of success as a programmer seems to be political emasculation.

I will understand if you do not allow this to appear at your blog, since I digress again. You are always welcome to visit me at http://www.spinoza1111.wordpress.com.

Humor aside, perhaps there was, in addition to excessive innovation, innovation not properly implemented.

Most of the innovation involved software, right?

And a “derivative” is by definition a financial deal, contract, product, or loan whose value is based on ANOTHER financial deal, contract, product or loan, right?

OK, what does this become in software?

It becomes some sort of software file, program or object which is linked to another software file, program or object.

The complexity is that the linkage can go further…and while a programmer would see the problem here, many people don’t.

Derivative A is linked to and dependent on B.
B is linked to and dependent on C.
C is linked to and dependent on … (drum roll) … A.

The computer hangs when the clerk tries to calculate a final price or otherwise cash out and unwind A. She presses Cancel, and the derivative remains for someone else to unwind.

Talk about toxic waste, right?

I first encountered this program in the old Cobol days. I was working with another guy at a reinsurance firm near O’Hare, where as you know, reinsurance is what insurance companies buy to protect themselves from the unfortunate event of having to pay a claim. As many people know who pay on medical insurance policies for years only to get screwed when they have a claim (as seen in Mike Moore’s film Sicko), insurance companies really, really hate to pay claims.

The user had contracted our firm to figure out why a program “took so long” and always got a “SOC7″ from OS/360, where to this day one cannot forget that SOC7 meant the program had exhausted its time slice.

[Memories are made of this.]

We discovered that the Cobol code was calling itself recursively and the original programmers had not realized that this was possible. It prohibited a policy from reinsuring itself, but the programmers hadn’t anticipated indirect recursion.

I created a (limited) stack using Cobol’s OCCURS clause and warned the user of the problem.

How much of today’s financial crisis is a fulfillment of Dijkstra’s grim warning that if we did not master software it would master us, Dan?

It is far too simple-minded when people try to pin the cause on so-called ‘excessive innovation’; not only is this a diagnosis with no context (i.e. how much ‘innovation’ ought to occur? and how is this to be determined? and what, exactly, is ‘innovation’?), but it completely ignores the lion’s share of the problem space. If one must boil it down to its simplest description, it might be more accurate to say that the problem was innovation disconnected from the natural consequence of failure (notice that we can use ‘innovation’ in the general sense here); or put more simply, riskless risk. This reality was implicit, but proved to be true nonetheless.

Now, the concept of ‘hands-off’ is well understood, second nature even, when people are talking about ecosystems, mechanical governors, etc., but this knowledge seems to go right out the window when we begin to consider human systems. If we analyze the situation with this in mind, we may begin to see that such a condition (i.e. this perverted situation of riskless risk) is the natural and expected consequence of setting up an absolute and coercive monopoly over the very lifeblood of an economy, money. As such, we should expect to observe booms and busts for so long as we decide it best to put our fingers into the machinery of the economy; it is immaterial whether those end up being the fingers of republicans/democrats/others – the only unknowns here are frequency and amplitude. The cause is that human regulators simply do not posess the capability of pulling the levers in such a way as to acheive equilibrium; even if they did, or if we could build machines powerful enough to work out the models; even then, we still lack the instrumentation necessary for feeding the algorithm; we are talking about trillions of decisions made by billions of people, which must be collected, analyzed, and understood on a daily basis, and this does not even begin to touch on preferences which are based on future unknowns. So it is a fundamental problem, first of measurement, and then of calculation. It is therefore, in my opinion, completely naive for us as a society, to assume that we can ‘regulate’ the economy with any net-positive effect.

So, I leave you with three words: unregulated private currency. If you are so inclined, you may find it an interesting exercise to analyze the full effects of this concept. Possibly you already have, but your post here does not lead me to believe so, so I suppose I’m safe in making the suggestion.

Cheers…

It would be fun if it wasn’t so sad

That could be true – but only if it were actually Microsoft that I was poking fun at