had been the first CFO of Microsoft, Chief Financial Officer of Microsoft and treasurer

of Microsoft, he came to Toronto in 2007 and took my wife and I out to dinner and said

he was trying to put together a research group to work on economics and he would like me

to be involved. And I said, "I don't know anything about economics." And he said, "That's

okay because nobody does and the whole system is about to collapse." He said, "The balance

sheets of all the big investment banks -- it's like they have cancer. They're full of holes."

And I remember being very struck by this because this was before anybody was talking about

this.

And so I started to meet with a group of people that he was pulling together to understand

what was gonna happen and to understand if there was any way to save the situation. It

was a very ambitious thing and, of course, we failed. But along the way I was motivated

as a kind of public service to get interested in economics.

And what I found . . . economics, in a way, is very easy for a physicist to understand

because it's very mathematical. And the mathematical models that they use are very clean. They're

based on assumptions and hypotheses, and you can study them. And as I studied it I began

to understand, some for myself and more from just reading around because the faults with

the standard economic models, with the standard models of finance, are well known. They have

been in the literature for decades and decades. So let me give some examples.

The standard model of economics is called the neoclassical model and it assumes that

markets or systems where trading happens between consumers and firms and there's certain simple

models of how that goes on. And the ideas that these come to equilibrium. Equilibrium

not in the physical sense but in special economic sense in which you reach a point at which

the prices are fixed such that market forces fix the prices such that you maximize the

happiness of the consumers and maximize the profits of the firms. And in so called equilibrium

nobody can become happier or more profitable without somebody else becoming less happy

or less profitable. And the ideology behind this -- not behind the mathematics because

mathematics doesn't have an ideology -- but behind the arguments that were made and still

are made from this model is that markets don't need regulation because they have these natural

equilibria where everybody benefits to the maximum possible. And if you're in equilibrium

you can't do better.

Now there's a fault with this and it's an obvious fault and it's been known since the

1970s from some theorems proved by some economists including some of the founders of this field

of mathematical economics, which is that there's not one equilibrium, there are many equilibria.

In fact, there's a vast number of equilibria. And so which equilibria, even assuming that

this is a decent model of the economy which is not clear, but even assuming it's a good

model, which equilibria you're in depends on the past history, it depends on regulation,

it depends on politics, it depends on taste, it depends on changing taste, changing preferences.

And so history matters and what's called path dependence matters.

This takes us outside the neoclassical model of economics but it doesn't take us outside

of economics because some wiser economist, for example, Brian Arthur had for years been

developing models and theories of path dependent economy where the history does matter. People

from the area of complex systems like Stu Kauffman, Prubac in developing models of markets

where the history matters, where there's not a single equilibrium, where there are many

equilibria. And where change is paramount.

Another symptom of this is the idea that arbitrage isn't, I mean, in these neoclassical models

when you go to equilibrium, arbitrage is impossible. Arbitrage is making a profit from trading

around a circle of goods or a circle of currencies without actually producing anything. And in

equilibrium that's supposed to be impossible but lots of firms and investment banks made

fortunes off of currency trading, so why is that? It turns out because you're never really

at equilibrium.

So why is the notion of equilibrium so powerful? I think part of the answer is this idea of

physics envy, that economists thought that what they're doing was more scientific, hence

more correct, if it looked like physics. And physics had this timeless picture in which

what really mattered, as we were saying before, is the whole history of the system. And in

physics there's also a big notion of coming to equilibrium which is, although however,

it's important to say, a different notion of equilibrium. And somehow people in economics

got seduced into this model which again works in the small -- if you have a small little

corner of the economy, a small market -- it may work for a while to characterize approximately

what's going on. Arbitrage is not always there. It's not always, I mean, arbitrage, arbitrage

does get eaten up. There are market forces which do push you towards equilibria. There's

some truth in it.

But the whole thing is a disaster if I can say that as an outsider. And it led indirectly

-- it wasn't the only reason why regulations were lifted on markets and trading through

the decades, but when people were making arguments to Congress, to the President's office that

the economy would be better off without regulation, this was the "scientific rationale for it"

and led to the very unstable situation of the last economic crisis.

And indeed there's still a very dangerous and unstable situation in the world economy

because -- well, I'm not an economist. I'm not gonna pontificate about the problems in

the economy, but one could see how the idea of timelessness gave false comfort to an unsuccessful

scientific theory in the realm of economics.