Given all the headlines about double-dip recessions, consumer and business de-leveraging, and unemployment it is good to get back to some basic trends that, in my mind, are not going to change.
On the front page of the New York Times we read “Advances Offer Path to Shrink Computer Chips Again” (http://www.nytimes.com/2010/08/31/science/31compute.html?ref=todayspaper). “Scientists at Rice University and Hewlett-Packard are reporting this week that they can overcome a fundamental barrier to the continued rapid miniaturization of computer memory that has been the basis for the consumer electronics revolution.” And to the revolution in the waging of war and keeping of secrets, on advances in finance and business technology and so on and so on.
The problem had been that “the limits of physics and finance faced by chip makers had loomed so large that experts feared a slowdown in the pace of miniaturization that would act like a brake on the ability to pack ever more power into ever smaller devices…”
The new method, discovered at Rice University “involves filaments as thin as five nanometers in width…”
“Separately, H. P. is to announce on Tuesday that it will enter into a commercial partnership with a major semiconductor company to produce a related technology that also has the potential of pushing computer data storage to astronomical densities in the next decade.”
These discoveries, if they prove successful, will help to maintain Moore’s Law, the idea that industry can roughly double the computing power of chips every 18 months, and the Storage Law, the idea that industry can roughly double the amount of data that can be stored every two years. These capabilities have been the back-bone of computing power for the past fifty years or so.
Trends like these are going to continue because there is too much to be lost if they do not. For one, governments cannot allow their countries to fall behind in the development of computing power. There are two reasons for this: first, governments need to keep secrets and so must be able to keep others from breaking codes; second, powerful governments must continue to be able to kill people better than other governments in order to maintain their position in the world. Thus the United States government must continue to finance the development of these capabilities. This is why one can continue to expect the development of a fully operational quantum computer in the next decade.
As with the Eniac computer that was developed in the 1940s to improve the accuracy of firing
shells into the enemy, military needs come first, business benefits follow.
It is my belief in the continuation of such trends that lead me to suggest such things as the ineffectiveness of the newly minted financial regulations even before they become operational. Finance is information. This became apparent in the 1960s when the new computer technology produced faster and faster computers and also produced computers that had the ability to store massive amounts of data from the stock markets. This led to a new industry…quantitative finance. The boom in finance Ph. D.’s got its start with the portfolio theory and CAP-M models developed in these years as it became evident that lots and lots of dissertations could be written given all the data that were now available to researchers.
This industry only grew as computers got faster and data storage capacities continued to increase. And, since we were only dealing in information and the manipulation of information, it became apparent that people in this field really did not need to know much finance because the crucial talent became mathematical model building and data mining. Consequently, backgrounds in physics and mathematics became very useful and the application of Information Theory to data streams provided a source for understanding signals that otherwise appeared to be “white noise.” (A readable source for all these developments can be found in the book “The Quants”: http://seekingalpha.com/article/188342-model-misbehavior-the-quants-how-a-new-breed-of-math-whizzes-conquered-wall-street-and-nearly-destroyed-it-by-scott-patterson.)
This financial engineering continues. This is why I believe that the financial reform package has been legacy from the start. The organizations that the financial reform package are supposed to regulate are, in many cases, already beyond the current legislation, and if they are not yet beyond it, the technology is such that they will be soon.
Is financial innovation going to continue to take place? Yes, and, in fact the pace at which it occurs will accelerate. And, this financial innovation is serving as a model for other markets, even for goods and services. This development is related to what is called “Information Markets” and, with the growth in computing power and the expansion of data bases, these markets are going to become more and more a part of how people transact in the future. (Note for example the new commodity ETF called U. S. Commodity Index Fund (trading symbol USCI). http://professional.wsj.com/article/SB10001424052748703418004575456221354231844.html.The economist Robert Shiller (author of Irrational Exuberance) has written path-breaking work in this area.)
Such developments have led to a boom in employment in the finance industry over the last forty years. This relative shift in employment will continue well into the future because it is information based and the use of information technology is going to spread and prosper.
This is why one person, Andy Kessler, a former hedge fund manager, has suggested (tongue-in-cheek) that one way turn the economy around is to import people that would buy homes. He writes: “I would wager there is a backlog of high-paying jobs for educated foreigners well beyond what H1-B visas allow to trickle in. In the name of financial stability, create a million visas for qualified immigrants, say, those with a masters or Ph. D., and watch home prices start to rise.” (http://professional.wsj.com/article/SB10001424052748704147804575455951017059416.html?mod=WSJ_Opinion_LEFTTopOpinion&mg=reno-wsj)
The important distinction here is that Kessler is writing about “educated foreigners” and not unemployed Americans. This seems to be an issue that many analysts are bringing up these days. The jobs that are available for workers are not the jobs that many of the unemployed or underemployed in the United States are able to fill. And, I don’t perceive that there will be a slowdown in the advancement of computing power and other technologies in the future which leads one to conclude that unless something is done about education and training, the United States workforce is going to bifurcate even further between those that can work productively in the 21st century and those that cannot perform at this level. Programs of fiscal stimulus that puts people back into the jobs they formerly held will not succeed only attempt to re-create the past.
Technology will evolve to produce “things” that are smaller and faster and these “things” will be used more and more in the creation and production of “information goods”. Furthermore, the speed at which these advancements take place will continue to accelerate. Organizations set up to operate within the past, like labor unions, are going to have to change and adapt to this environment. Otherwise, they are more of a dis-service to their constituents than a help. But, that is the future.