I recently read an interesting book on reality, entitled The Fabric of Reality. In the book, David Deutsch constructs a unified theory of reality by combining four fundamental theories:
1. Quantum mechanics (multiverse interpretation).
2. Turing principle of computers and artificial intelligence.
3. Popperian epistemology.
4. Darwinian evolution.
Deutsch says:
In all cases the theory that now prevails, though it has definitely displaced its predecessor and other rivals in the sense that it is being applied routinely in pragmatic ways, has nevertheless failed to become the new ‘paradigm’. That is, it has not been taken on board as a fundamental explanation of reality by those who work in the field.
Thus practitioners may reject the multiverse, which Deutsch regards as the straightforward explanation of quantum mechanics. Or they may deny that a machine could replication a human brain. Or they may argue for “exceptions” to evolution, such as punctuated equilibria. Or they may argue that Popperian epistemology has a “problem of induction” and create alternative models such as the Kuhnian explanation of scientific progress.
Unlike many others, Deutsch takes the straightforward interpretation of these 4 theories quite seriously:
My thesis, therefore, also takes the form ‘the prevailing theory is true after all!’ . . .
I have also argued that none of the four strands can be properly understood independently of the other three. This is possibly a clue to the reason why all these prevailing theories have not been believed. All four individual explanations share an unattractive property which has been variously criticized as ‘idealized and unrealistic’, ‘narrow” or ‘naive’ — and also ‘cold’, ‘mechanistic’ and ‘lacking in humanity’.
[Note: When Deutsch says: “the reason why all these prevailing theories have not been believed”, I believe he means the straightforward interpretation of these theories have not been believed. See the first quote above.]
Deutsch is doing something quite strange. He’s claiming to be a contrarian because he accepts a straightforward explanation of all four standard models. I don’t have enough expertise to evaluate his views on the nature of reality, but these comments reminded me of many of the disputes that I see in economics. Hypotheses such as the Efficient Markets Hypothesis and Rational Expectations lie right at the center of modern finance and macroeconomic models. And yet many economists claim not to believe these theories. They regard them as ‘idealized and unrealistic’, ‘narrow” or ‘naive’.
Like David Deutsch, Paul Krugman found himself playing the role of being a rebel, merely by defending the standard model of comparative advantage:
There is nothing that plays worse in our culture than seeming to be the stodgy defender of old ideas, no matter how true those ideas may be. Luckily, at this point the orthodoxy of the academic economists is very much a minority position among intellectuals in general; one can seem to be a courageous maverick, boldly challenging the powers that be, by reciting the contents of a standard textbook. It has worked for me!
But to many non-economists, and even some economists, concept such as comparative advantage and creative destruction can seem (to quote David Deutsch):
‘idealized and unrealistic’, ‘narrow” or ‘naive’ — and also ‘cold’, ‘mechanistic’ and ‘lacking in humanity’.
At times, I find myself in a small minority simply by defending the standard model. I argued that the 2000 tech stock boom and the 2005 house price boom were not bubbles, because the EMH says that bubbles do not exist. People have rational expectations regarding the future path of asset prices. I really believe that.
Or take the standard model of money, spending and the business cycle:
1. Monetary policy determines the path of nominal spending, at least when interest rates are positive.
2. A crash in nominal spending would cause a severe recession.
3. NGDP growth plunged dramatically during 2008, at a time when interest rates were not stuck at zero.
So . . . what is the straightforward interpretation of these three uncontroversial claims? I argued that this suggests the Fed caused the Great Recession with a tight money policy that drove NGDP growth from positive 5% to negative 3%. But almost no one accepts my claim.
“Yes, that’s what the model suggests, but it sure didn’t look like the Fed caused the recession.”
I feel a bit reassured that people much smarter than me run into the same resistance:
“Yes, Ricardian theory suggests that the US benefits from imports, but it sure feels like they hurt our economy.”
“Yes, the EMH suggests that the stock market is efficiently priced, but it sure looks like there are periods of irrational exuberance.”
“Yes, quantum mechanics seems to suggest that there are a dizzying number of universes, but that seems implausible.”
“Yes, the Turing Principle suggests that a computer could have human-like consciousness, but my own consciousness seems sort of special, not merely mechanical.”
