The New Atlantis recently published a piece by Paul J. Cella III in which he argues that the financial crisis was the result of a modern mindset committed to rationalism and abstraction.
The modern mind broke down on account of its infatuation with abstraction. That mind is singularly susceptible to falsely imagining that ideas are more real than men. The power of the lapidary theory over the modern mind has been often remarked. The whole of the twentieth century was marked by calamitous wars driven by the imperial impulse of what Edmund Burke called “armed doctrines.” Armies, impelled by their doctrines, rolled over half the earth, leaving behind blood and smolders.
These false conceptions of reality change how we see both property and human beings. Regarding property, Cella writes:
In finance, this failure of the modern mind, its subjection to the allure of formula and abstraction, took on another aspect: the reduction of property to mathematical abstraction. The nature of property itself seemed to transform under the influence of these abstractions. The old and familiar debt instrument known as a mortgage is already an abstraction from real physical property. Pooling these instruments into complicated securities is another step of abstraction. And, in still further steps of abstraction, probabilities concerning default rates on property debt were converted into revenue streams that could be securitized. Credit-default swaps were rolled into new revenue streams and resold. Collateralized debt obligations were “squared.” Little fragments of land and housing, from neighborhoods of enormous variety all across the country, were converted by statistical abstraction into an unfathomable infrastructure of debt securities.
The complexity of these securities exceeds the power of the unaided human mind; formulas and models are necessary to apply probability rules to such enormous data sets. Property was transfigured, with help from computers, into equations. It is all very bewildering, this enfolding web of abstraction and statistical capture.
Human beings were also misconstrued by this false conception of reality:
Here we touch upon the second error the modern mind evinced in the financial crisis: a misunderstanding of human being. It is foolish in the extreme to ever imagine that any mathematical formula, no matter how subtle, can properly capture the mystery that is man. This is the simple wisdom that modern finance forgot. Our mental imaginings and computations, no matter how precise, are but approximations of the real world as it is. Our perception, even aided by machines and computers, is strictly limited. Our technical capacity is considerable, but there is still much that is beyond us.
Wall Street, at the very pinnacle of financial engineering, came to believe that derivatives on statistical abstractions were more real than men — and certainly more real than their houses. The financiers supposed that the economics of man can be perfectly figured by formula, by imitating the computation and abstraction of hard science.
All of this suggests that, at heart, we must re-conceive of economics “as if people mattered” (to borrow a phrase from E.F. Schumacher) and as if the integrity and reality of property established limits for a stable (not to mention sane) economy.