Protected: Back to MIT and haunted by some painful memories of the night I left

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Off to Wikimania….

Will be heading off to WikiMania on Tuesday. The nice thing about blogs is that you can mix the personal and the professional. I’m a very nervous about going off to WikiMania because I’m in the middle of a life transition, something similar to graduating from college. I’m going to start travelling a lot more in the future than I have in the past, and things like my career, my family, and basically who I am are going to change radically in the next few months. As with all life transitions, I’ve been very, very nervous and stressed. I’ll survive, but it is uncomfortable. On the other hand, growing up always is.

The basic plan is that I’m going to be travelling to Taiwan in the summer when school is out for the kids, and I’ll be travelling either to NYC or Boston one week each month. One week each month should give me enough time and energy to network and start publishing papers. Part of the reason this is uncomfortable is that I’m not used to travelling so much. I’m also not used to spending money quite this freely. I’ve always been taught to save up money for the future, but the future has arrived, and if I don’t cash in my chips now, I don’t know when I ever will. If I don’t travel, I can’t network, if I can’t network, then I’m stuck in Austin for the rest of my life, and the thought of being 50 and doing what I’m doing now is both depressing and scary. I don’t want that to happen to me, and if I want to avoid that, I have to do something about it now.

A lot of this becoming a “global nomad” has to do with changes in technology and the way that the world works. Phone calls and telecommunications have made working remotely extremely cheap. Jet planes and discount tickets have also changed the economics of flight. One final thing that has also changed. In 1949, my family ended up on different sides of the Taiwan straits, and because of this separation, I’ve always had somewhat of a psychological resistance to anything that “splits the family.” One thing that is the case is that I’m now growing more confident that there won’t be a repeat of the Chinese Civil War, and this has freed up a lot of psychological energy, and made me less afraid of flying to and fro, and having my wife and kids physically in a different location than I am in.

I’m anxiously awaiting direct flights between Shanghai and Taipei in 2008, and that will just be the beginning. What will really change things is when you have direct flights between 2nd tier cities like between Jia-yi and Taizhou, Zhejiang or Hefei, Anhui which should start happening in the decade or so after the start of direct flights, at which point I really become a nomad. That opens up a whole other set of issues. My relatives in mainland China are blood, but they are still largely blood strangers, and either connecting or reconnecting is going to be stressful and create huge new constellations of relationships.

And with all of the changes and stresses in my life, it’s not surprising that I’ve been thinking a lot about my alter ego Professor W and his wife Professor L (see the sidebar). Professor W (aka the person I would have been if some things had changed) is more or less satisfied with his professional life, whereas it wasn’t until my nervous breakdown about three weeks ago, which was triggered by an article about the “real” Professor L, that I was willing to admit to myself (or more accurately forced to admit to myself) how totally dissatisfied I was with my professional life. The fortunate thing, however, is that to change this part of my life, I don’t need to break any fundamental laws of physics.

Regional Chinese economics

One thing that I’ve been talking about a lot is how 18th/19th Chinese philosophies such as the Evidential school are deeply connected with the development of current Chinese science. On thing that hasn’t been studied is how they are connected with current Chinese economics. The expression “seek truth from facts” wasn’t invented by Deng Xiaoping, it was the slogan of the Evidential school of the 18th century. Also, 19th century astronomers and mathematicians in Zhejiang and Jiangsu come form “gentry-merchant” families, and this one could assume that these created some deep links between science and economics that haven’t yet been explored. But it is not a coincidence that my father is from Zhejiang, my doctorate degree is in numerical astrophysics, and I’m rather actively in issues of quantitative finance.

Something that one needs to be sensitive to however is “economic geography.” Just because something works in one part of China doesn’t mean that will work in another. Zhejiang and Jiangsu are provinces in which private businesses work really well, but one has to be careful of “one size fits all thinking.” Just because something works in Zhejiang doesn’t mean that it will necessary work in Liaoning or Sichuan, and taking a habit from the Evidential school, you have to be really, really, really careful to make sure that the conclusions that you make, follow from the facts that you see.

Interest rate derivatives and the third lever

One more post, and I’ll start to do real work.  I’m in the process of reading Modern Pricing of Interest Rate Derivatives by Rebonato, and this is turning out to be much more useful than I thought it would be.  The PRC market doesn’t have much in the form of Interest rate derivatives, (some swaps in the interbank market) so there isn’t a demand for quants that can calculate these things.

What I’m wondering is that how interest rate derivatives work with the “third lever.”  Western economies are controlled by two levers, fiscal policy, and monetary policy.  The Chinese economy is controlled largely by the “third lever” which are government directives that directly order “macroeconomic adjustment.”  The recent flurry of adminstrative orders on the real estate market is an example of the “third lever” in action.

So one thing I’ll be thinking about is how interest rate derivatives should/do interact with the third lever.  This involves getting deeper into macroeconomics than most quants, and at that point my tendency toward “Austrian models” will probably come in useful.  The problem with most macroeconomic such as the “neoclassical synthesis” and the “Keynesian model” is that they assume that the economy is already structured in a certain way, which means that they are useless if the economies *isn’t* structured that way or if they question on the table is how the economic *should* be structured.  So if the main control over the Chinese economy is this “third lever” then its hard to understand how this works from a non-Austrian viewpoint.

The cool thing about Austrian economics is that Austrian economics starts basically from the viewpoint of basic human desire.  You look at the individual, see what they want, and then how individuals interact with each other, and then you build your models from this.  This means that the fact that the Chinese economy could/should work completely differently as no bar to using analysis via Austrian models.

The other thing that I could work on is trying to get jump models into the interest rate market models, and try to figure out how all of this works with convertible bonds.

Anyway let me stop blogging and just do that….

Darwin not Lamarck

A lot of my views on Chinese economic reform have to do with the fact that I’ve worked in a private company.  I’ve seen enough incompetence in them that I just can’t take seriously anyone who thinks that “privatizing” a company will make them sudden act rationally.

Market economies are based on Darwin and not Lamarck.  In Lamarckian evolution, a giraffe gets a longer neck because it tries to eat higher and higher branches and any improvements in the giraffe in one generation get passed to the next.  In Darwinian evolution, what happens is the giraffes with short necks die off faster than those with long necks.

The economy seems more like Darwin and less like Lamarck.  There is no internal constraint keeping a private company from doing stupid things, and  private companies do do stupid things.  What keeps things from falling apart is that if you keep doing stupid things, you just run out of money and you can’t do stupid things any more.

Lee Teng-Hui doesn’t understand the global economy

http://www.taiwansecurity.org/TT/2006/TT-270706.htm

He still doesn’t get it.

At the CSIS conference in March, one of the speakers said that the question is no longer “do we do business in country X?”, the question is “what parts of our business do we put in country X? what parts of our business do we put in country Y? what parts of our business do we put in country Z?” The way that business and commerce works is that you now have very complex and integrated transnational supply and logistic chains, and no part of these chains and remain “independent” of any other. If Taiwan tries to not get linked to Mainland China, what will happen and what has happened is that international capital will just bypass Taiwan.

And the particularly bad part is that political incompetence is destroying the natural geographical advantages that Taiwan has.  Taiwan would make a *wonderful* base of operations for a business wanting to operate in southern Mainland China (even better than Hong Kong in some ways), if not for the political and economic incompetence of the people now running the island.

On kids and national identity….

Right now my kids are in Taiwan right now, and the plan is that they family will spend summers there, and I hope to use Taiwan as a base of operations to make trips to Shanghai, and to see relatives in Zhejiang and Anhui.  Once direct flights start between Taiwan and the Mainland, everything is going to change.

One implication of this is that they are going to have multiple national identities.  They are going to think of being “American” or “Chinese” in much the same way people think of being “Texan” or “Shanghaiese”.  Since they are going to be travelling between the United States, Taiwan, and mainland China so much, no one is going to have an exclusive claim on their “national identity.”  (This includes both “ethnic” identity and “political” identity since my kids will have both United States passports and Republic of China passports.)

The problem I’ve always had with the notion of “Taiwan independence” and the problem it is going to have with globalization, is that the ideology of Taiwan independence makes these multiple identities impossible, and suggests that if you do have multiple identities then there is something wrong with you.  It’s not the “you are Taiwanese” part that has bothered me, it is the “you are not-Chinese” part.

One way of handling this is by attempting a separation between “culture” and “politics.”  You are political American but culturally Chinese.  The Singaporeans came up with that idea and it seems to work well in Singapore and Malaysia, but it doesn’t work well in my situation.  I do want my children to be full participants in the political life of the United States, Taiwan, and mainland China.

Again this runs against “Taiwanese independence” ideology, which states that only people living on Taiwan have a legitimate right to determine the political destiny of Taiwan.

This again flies in the face of global reality, and Chen Shui-Bian hit this problem earlier this year.  The problem is that a TI supporter tells an American with no particular connection to Taiwan that they do not have the right to influence Taiwan’s internal affairs, and then the American looks at him and says “wait a moment, if Taiwan’s domestic problems cause a major political crisis, isn’t it the Seventh Fleet that will have to bail Taiwan out, and isn’t it American sons and daugthers that will risk being shot at.”  At that point the idea that only Taiwanese have the right to determine Taiwan’s political future becomes untenable.

I don’t think that the “nation-state” is becoming obsolete, but I do think the whole notion of “exclusive national identities” is going to disappear pretty quickly in a generation or two.  I don’t think that my kids are going to be the only “transnationals” out there, and it wouldn’t surprise me that if by 2050, people think that you are odd if you *aren’t* a dual national.

How I view the world…..

Everyone has a personal philosophy which is based on all sorts of influences.  It turns out that a great deal of how I view the world is derived from Dai Zhen and the Evidential School but there are some huge differences.   Just to name a few

1) Gender relations.  I happen to believe that women can and should join the “academic priesthood” and that genealogy should be equal across both male and female lines.  Both beliefs have some pretty huge implications.

2) A concern about power and social relations.  There is an edge and an anger in my philosophy that isn’t in Dai Zhen.  A great deal of this (and this is where thinking about my alter ego Professor W has come in useful) is that most of the evidential school thinkers near the top of the social class structure, whereas I’ve always felt nearer to the bottom.  As a result, a lot of my ideas are influenced by Marxist critical theory.

3) The rituals I use are Buddhist.  The Evidential school members were vehementally anti-Buddhist, and would be shocked that most of the rituals that I use are Buddhist (because my wife is Buddhist).

4) The interaction between nationalism and universalism.  I live in a world of nation-states, whereas Dai Zhen did not.  Part of my concern with the Boston Confucians is that they seem to want to create a universalist version of Confucianism, and that concerns me, since it seems to pretend that nation-states and state bureaucracies don’t exist/don’t matter when in fact they do.  A great deal of my interest in Confucianism is to use it in order to “renew the Chinese nation” and that involves playing up the “Chinese” aspects of Confucianism.

The analogy that I’d like to make is that suppose I wanted to invoke a historical hero to change Mexico politics.  I’d could invoke the memory of Benito Juarez.  Now suppose I want to make similar changes to American politics, it wouldn’t make any sense for me to talk about Benito Juarez, since Juarez isn’t perceived as part of the American collective history.  I’d talk about George Washington or Alexander Hamiliton.

Similarly, Confucius has a special role in Chinese political discourse.  In talking about Chinese politics, I could invoke Juarez, but I’d get strange looks.  So I’m a bit concerned, when Confucius is “de-sinicized” and disconnected from the Chinese nationalist program.

Opus dei and the Boston Confucians

I’ve found that I get more readers when I put in odd keywords.

I’ve been doing a lot of thinking about my own philosophy and how I’ve been influenced very heavily by the Evidential School of Dai Zhen. This explains a great deal, like why I seem to find Opus Dei appealing and why I’ve always have issues with the approach of the “Boston Confucians” even though I suppose technically, I am a “Boston Confucian.”

One of the interesting books out there is “Manufacturing Confucianism” by Lionel Jensen who argues that a lot of what we think of as “Chinese Confucianism” was heavily influenced by Jesuit missionaries. If you at example of this, just look at the name. Confucius was Chinese, why does he then have a Latin name? Answer, the Latin name came from the Jesuits.

There is a lot of Jesuit influence in the Evidental School which got passed down to me, and Opus Dei was founded by Jesuits. This means that Opus Dei and I are ideological cousins, which is why I find a lot of the ideology of Opus Dei reflecting my one views of the world. For example, I believe that “work” shouldn’t be considered a separate category of existence. When I program quantlib or do anything involving C++, it’s part of a spiritual quest. One of the things that both Opus Dei and the Evidential school believes is that you don’t find spirituality by focusing on the abstract, you find “God” by focusing on the specific and concrete. You find God, not by thinking abstract thoughts, but by driving a car, ordering a hamburger, listening to music, and programming C++ quantitative finance models and installing database patches. One of the critiques for “what is wrong with the world” that I share with traditionalist Catholics and fundamentalist Protestants is that the idea of “spirituality” has been separated from people’s daily lives.

This also explains why I’ve never found the ideas of the Boston Confucians appealing. Boston Confucianism by and large descends from Cheng-Chu school which emphasized abstract, rational thought. The problem I have with Boston Confucianism is the general problem that the Evidential School had with the Cheng-Chu school, that if you focus on the abstract, you lose touch with the concrete.

I should point out here that I think the term “Confucian” and “Confucianism” are wildly overused. It’s the “Cheng-Chu school” and the “Evidental school” and the “literati.” Adding the term Confucianism to these items really adds nothing, and actually distracts for understanding. For example, adding the term Confucian hides the fact that the “Confucian, traditional literati” of the 1890’s were by and large the exact same people (or at least the same families) as the “anti-Confucian, modernist scientists” of the 1920’s, and that there are huge continuities in thought. It also obscures the fact that the “Cheng-Chu school” and the “Evidental school” although both labelled as “Confucian” really have nothing in common with each other.

In the case of the Boston Confucians, I don’t think their project of making Confucianism into a universalist philosophy makes sense any more than it makes sense to turn Judaism into a universalist philosophy. There are specific rituals and practices I associate with “being Confucian” just as there are specific rituals and practices associated with being an orthodox Jew, (and I’d like one day for someone who is an orthodox Jew to explain why there are also so many Jewish astrophysicists. I suspect there are some very interesting commonalities.)

These rituals are not universal, but they are the scaffolding on which all of the abstract and general are connected to, and if you remove those then the whole ideological structure collapses. It’s impossible to get to the abstract and general without have concrete and specific rituals. They can be different rituals from group to group, but there has to be some ritual, and it’s a mistake to think that you can get to the general without some odd weird ritual.

Here is an interesting fact. My high school Latin teacher, who I always thought of as “very Chinese” enough he came from North Carolina and was caucasian. I think he understood the role of ritual, and had views that are similar to mine (although it is hard to say because I may have gotten my views from him). I mentioned that we were ideologically similar, which isn’t surprising since we both got some views form the Jesuits. One interesting fact, he became a Latin teacher because he was a Catholic traditionalist, who thought English masses were a bad thing.

Starting to focus some more….

I’m starting to focus a bit more.  Right now I’m trying to get out of “creative, million idea” mode and into “learn this information deeply” mode.  The two papers that I’m reading is one by Peter Carr that describes the time evolution of the “volatility smile” and the other one is a long dry description of the changed to the China company law.

One thing which is relevant to my ideas about Chinese companies is that I’m not a fan of the idea of “private ownership makes companies run better” because I’ve worked in private companies in the United States, and have seen some pretty silly things happen in them.  The reason, in my opinion, market economies work isn’t that “private owners don’t do stupid things” is that they have “hard budget constraints.”  If you do something bad, eventually you run out of money.  So as a result in the conversation between finance people and management people, I tend on the finance side.