Finding the Limit

Critical to any analysis is to recognize the limitations of the data. Identifying, describing, and explaining the limitations is where interpretation of the data takes a speculative dimension and tends to reduce to the assumptions inherent to a theoretical and practical model.

Political-economy is replete with an inability, if not an unwillingness, to technically identify the limitations of the data. This is mostly to avoid the risk of throwing out a model which may mean throwing out the principles, or assumptions, inherent to a model; and since political-economic arguments are usually based on immutable, absolute truths, these principles cannot be modified without reforming the model. Arguments tend, then, to be rhetorical and not scientific, refusing to recognize the limitations of the data where the truth is waiting to be discovered.

Philosophically, this discovery of latent truth is called "the thesis of independence" in which reality, Aristotle argued, is independent of perception. The implication to be avoided is that truth is not whatever we want to make it. (When hedge funds "make the market," for example, the risk is not reduced, it is transformed and will re-present in another form.) Our perception of things is immutably either true or false, right or wrong. The scientific method, however, is more phenomenological (dependant) because reality is based on perception (the ability to detect signals that indicate knowledge--the phenomenon--of the truth). That is: reality is only as good as our perception of it, which could very well be limited by the interpretation of the data (the signals that are, or are allowed to be, detected). In other words, without the scientific method, we may, or may not, have the truth, but we would never know it.

Kantians argue it both ways, much like Plato did, postulating that truth can be known by a critique of pure reason, with science (practical reason) verifying what we already know. For Kantians, moral truth, for example, can be logically reduced to "categorical imperatives" that are verified by practical application (verifying what we already knew).

According to Emanuel Kant, there is no limit to knowledge. It is as unlimited as our imagination, which was verified by Einstein's conceptual modeling in the 20th Century, and suggests today's M-theory in which probability is infinitely extensive but quantifiably limited (like the example of the hedge fund's perception of the risk being quantifiably limited and local but extensively unavoidable).

Despite Kant's epistemology, we may have truth but never know it without verification, which is the built-in rhetoric--the universal ethic of thinking, the immutable rule of reason--that governs the scientific method.

Models conceptualize what is believed to be the truth. When applied, however, the results (the signals detected) are likely to modify the perception. If the model is not changed to represent the knowledge of it (the phenomenon), then the "reality" becomes a function of intentional error (teleology). The phenomenon is the reality that philosophers like Hegel and Marx described as "alienation." Even though we may "know" the reality is "not" true (the null hypothesis) in a Kantian way, nature dialectically reconciles the discrepancy (the error), reducing the cognitive dissonance by our choosing the new model, nulling the hypothesis in posteriori (ontology).

Truth just ontologically is. It does not care what our perception of it is and so we are determined to a natural existence despite as we may to teleologically make our own reality in spite of the ontological truth.

The model of capitalism, for example, assumes a free market. The model assumes that capitalism accurately represents our natural existence and is empirically measured by free exchange in the marketplace in which our dollar votes democratically choose the difference between right and wrong, extending down to each and every individual. Winners and losers are ontologically selected (determined) by collective action extended from individual tastes and preferences.

If government chooses winners and losers with tax and subsidy, the system is teleologically corrupted. The model is no longer ontologically true (a free market). Winners and losers are no longer objectively determined by the legitimate logic of collective action and the model has reached the limit of the available data that determines the legitimacy of the risk/reward. The data is now interpretatively limited to validate, rather than verify, the model, which essentially disconfirms it.

The extent of government measures the extent of a free market and the extent of the risk (the alienation that Hegel and Marx describe). The Tea Party caucus detects the extent of the risk, for example, demanding we go back to a free-market legitimacy. They detect signals (budget deficits, for example) that indicate crises that they know by experience reduces the income required to have equitable dollar votes in a free market.

Marxists argue that there is no going back. The evidence, however, does not support that hypothesis.

Despite an observable dialectic, history is not perfectly linear, and a linear projection indicates a marketplace that is so consolidated (the banking system, for example) that individuals have progressively less choice for collective action. It can hardly be considered an improvement despite what progressives may argue in the name of the public good, rendering a public policy environment that is anything but liberal as "liberals" are apt to allow for continuous consolidation of power to control risk (bailouts, mergers, and expansion of debt to provide for our social security) in a characteristically conservative manner (what Marx called "anti-socialist socialism").

We have reached the limit and the Tea Party caucus is an indicator of that arrival. The freedom to choose is not ensured if we have to do business with firms that are progressively more consolidated. Sure, that accumulation of power is destined for a distribution, but that correction does not have to be catastrophic. We can accept the limitations of capitalism and deconsolidate the risk as the primary function of government authority, much as Adam Smith described it economically, and Thomas Jefferson politically. These are not ideas limited to a historical time and space.

The model of democratic pluralism is a model that is still unfolding to reveal the reality of a natural existence that is not limited to the better judgment of elite authority. It is not necessary to sacrifice liberty in order to attain it.

Thomas Jefferson said revolution is a continuous process of improvement as long as power is not allowed to consolidate, much like Adam Smith described it.

Dialectically, the antithesis of directing risk into continuous consolidation is to reverse the trend and deconsolidate. According to Hegel, for example, it is the rational action to take, and what is rational is what is verifiably real (universal, immutable truth); and Kant adds that it is therefore a moral imperative. Hegel argues we are determined to make the right choice because what is rational (dialectically determined) is really not a choice at all. What is rational is immutably real--either true or false like one-plus-one always verifiably equals two. Kant agrees, but contends that choice is not limited to the dialectic--we can choose to be irrational and accept what is not morally imperative, or conversely interrupt the dialectic and project rationality into the future to give truth (reality) the currency of present value (what is and always will be, like our "inalienable" rights, formulated into an ontologically confirmable hypothesis).

Jefferson and Smith tend to agree with Kant while Marx tends to a dialectical determinism. Marx, though, admitted that it appears to be a "soft" determinism, recognizing that we don't have to wait for catastrophe to do the right thing (confirmed by avoiding potential disaster).

Pluralism, according to Smith and Jefferson, is a way to have freedom (the reality of choice) without sacrificing ontology. A free market, for example, puts ontology to work for The People. The dialectic occurs in small packages. Risk is not allowed to accumulate into a crisis (gamma) proportion because it is micro managed by each and every individual according to his or her moral imperative, forming a collective ontology We call a free and open society (the classic concept of liberalism).

Philosophy has everything to do with technical analyses. The assumptions that go into analytical models determine the limits of the data toward a predictive utility. Assessing risk, for example, is a highly philosophical endeavor.

The hedge fund example illustrates the need for philosophical insight to determine the extent of the risk. If analysts consider dialectics to be a lot of Marxist bunk, then they are unlikely to see that risk is not being created with financial leveraging tools, but is being reshaped. Risk is not being created ex nihilo, but accumulated. Then, of course, the complaint is that risk is too accumulated, but because it is not considered to be dialectic, but an expected risk-ontology of the business cycle nevertheless, they do not consider themselves responsible for the full value of the risk that comes back to haunt them to exact austerity in the same measure.

Ensuring the pluralism of a free-market system in priority exacts this austerity (the full value of the risk of loss fully assumed) in small (non-economy-of-scale) units. Factoring in the trillions and trillions of dollars spent over the past two years to manage the accumulated risk, with more to come, the economy-of-scale efficiency is decidedly inefficient on a colossal scale. Nevertheless, we will ideologically (philosophically) ignore the technicals and limit the data, as well as its interpretation, to conserve the accumulated value of the risk in a crisis proportion. That proportion, however, as I have endeavored to describe and explain on this web site, is ontologically gamma--it will unavoidably emerge with a power and determination that needlessly condemns us all to the fate (the inevitable austerity and insecurity) of ignorance and irrationality.