I reviewed Scott Patterson’s book The Quants for our summer issue, and I’d like to expand upon my conclusion. I wrote:
The professors are the new barons of Wall Street, and they appear poised to accrue even more power. They are like “civil engineers … after a bridge collapse,” Patterson writes: they’re to blame, but they’re also needed for the rebuilding. The Quants is a great starting point for understanding how the members of this new financial elite brought down, and might again build up, our nation’s economy.
Simon Johnson, reviewing The Quants together with Michael Lewis’ The Big Short, gives a telling comparison between the Quants of today and The Best and the Brightest of the 1960s. He writes:
there remain countless innovative ways for genius—stimulated by greed and groupthink and an open unregulated field—to lead us seriously astray and into more great danger.
Johnson, who contrasts “genius” with “wisdom,” sees the portion of Wall Street’s problems caused by the quants as part of a more general problem. Self-confident genius academics come up with a new paradigm for how to do something (e.g. make foreign policy or trade convertible bonds); they leave the academy to put their ideas into practice while gaining power, glory, and riches; something goes disastrously wrong; the geniuses try to “solve” another problem.
In a recent column, Ross Douthat explains how this type of elite consolidates its power through crises:
Once a system grows sufficiently complex, it doesn’t matter how badly our best and brightest foul things up. Every crisis increases their authority, because they seem to be the only ones who understand the system well enough to fix it.
But their fixes tend to make the system even more complex and centralized, and more vulnerable…
As Douthat would have it, the last line of my review should read “how the members of this new financial elite brought down, and made themselves necessary for the rebuilding of, our nation’s economy.”
I think that Johnson’s and Douthat’s ideas are incompatible — and I think that Johnson is nearer to the truth.
Douthat’s argument ignores the possibility that some outside group will propose a new system to replace, rather than fix, the old broken one. Johnson affirms the existence of such groups. How simple was the State Department in the 1950’s? How simple was Wall Street in the 1980’s? The 1930’s? In each of those cases, an outside group took power and fundamentally changed the system. Such changes could not have possibly increased the power of those who fouled the system in the first place.
I’m happy with my weak-ish assertion that the quants “might again build up our nation’s economy” (although I should have used “financial system” in place of “economy”). It is by no means necessary that they will be the ones to do so, but they have thus far been heavily involved in the recovery efforts, and no group seems to have a credible, paradigm-shifting solution.