What we got instead
Strange metals, credit default swaps and the arc of human progress
Last week’s posts The cult of Bitcoin culture, Thanksgiving leftovers and a clear view is not a short distance have all now opened up for unpaid users. If you haven’t had a chance to check them out yet, take a look! The cult of Bitcoin culture caused a bit of stir on Twitter.
Want to read posts like these as soon as they become available?
Inside this issue:
What we got instead
Coinbase: the casino that cares
Biden issues a Bitcoin price prediction
What we got instead
Traditionally in science we start with simple straightforward names for simple straightforward things ('metal') and then as the science gets more advanced the names for things get more and more complicated until they are completely unwieldy and impractical ('heavy fermion YbRh₂Si₂') and at which point the science is finally fancy enough to use simple names again ('strange metal').
Strange metals are (as the name probably suggests) poorly understood. They are a class of material whose electrical properties don’t conform to our traditional theories about conductivity. Strange metals are closely related to the study of room temperature superconductivity and other advanced material science and of course they are useful in studying the nature of electricity itself.
For example, our current theoretical understanding of electricity is that it is caused by the collective movement of electrons within the material — which means electricity comes in discrete, indivisible units each carried by a single electron. But Liying Chen (then a graduate student at Rice University) devised a technique to build a viable strange metal nanowire ~600 nanometers long by ~200 nanometers wide. A team of physicists at Rice measured current flowing through those wires and discovered that there were no discrete units. Whatever was carrying the electricity through the strange metal, it wasn’t particles — because you couldn’t count them.
That’s a bit like discovering a new kind of liquid that flows so smoothly it can’t be made out of individual molecules. No one really knows what it means yet. It’s probably useful — discoveries like this are pretty integral to things like computer chips and computer chips are generally considered useful. But mostly it is interesting and cool and tells us something profound about the universe. Science!
If you are curious Quanta Magazine has an excellent article describing the research in more detail that I recommend. There was one small section of one relatively inconspicuous sentence in the middle of the article that leapt out to me and made me want to write something in response. See if you can spot it:
Chen (the physicist who invented the technique for building nanowires) has left the study of physics to join the finance industry. The movie industry produces movies. The software industry produces software. The steel industry produces steel. What does the finance industry produce? What is Chen doing now, instead of physics?
Naively, we might imagine that the finance industry produces money — but that doesn’t quite fit. Money is just a unit of measurement. Saying the finance industry produces money is like saying a watch factory produces time. Perhaps the finance industry produces wealth? But that doesn’t really work either — literally every industry creating something of value is 'producing wealth.'
The optimistic answer to this question is that the finance industry produces cooperation; that by creating new financial structures and contractual arrangements the financial industry creates new opportunities to create value. Finance in this view is like a matchmaking service between entrepreneurs and investors. More cooperation means more value produced for society overall.
The pessimistic answer to the question of what the finance industry produces is that 'produce' isn’t the right way to think about what they do. A musician who performs a concert is producing value. A scalper who buys as many tickets as they can to resell them in front of the concert for a profit is not.1 Perhaps the main purpose of the finance industry is not to produce value but to capture it.
Consider credit default swaps for mortgage backed securities, the notorious financial instruments that instigated the 2008 financial crisis. One way to think about them is as a tool for enabling more people to own their own home for the first time — which they did. Another way to think about them is as a clever trick for taking on irresponsible lending risk and then tricking someone else (at first other banks, but then eventually the taxpayers) into eating the downside.
Obviously the reality of the finance industry a complicated blend of both cooperative value production and competitive value capture. I personally think high-frequency trading is predatory but payment for order flow is probably fine. Reasonable people can disagree about where to draw the line. Most work in the financial industry probably involves a mix of both production and predation.
The productive kind of financial work is the kind that helps the rest of the economy grow — so the smaller a financial industry is relative to the economy it is a part of the more likely it is to be productive and beneficial. When financial work is predatory it doesn’t create (or can even destroy) other kinds of value production — so the larger the financial industry is relative to the rest of the economy, the more likely it is to be predatory than productive.
The world has a finite supply of Liying Chens. He is one of only perhaps a handful of people with the intellect, drive and creativity to invent new nano-materials. Perhaps given a few more years to pursue his research he might have stumbled on a material science breakthrough — maybe some kind of stepping stone on the path to practical superconductors or quantum computers? We don’t know.
So when I read the sentence "Chen … has since gone to work in finance" I can’t help but wonder what we all gave up when he left physics — and what we got instead.
Other things happening right now:
Here is a new video ad from Coinbase. On the one hand this is an excellent advertisement that really speaks to some deep existential questions people have about society right now. On the other hand, Coinbase’s business model is mainly selling users the opportunity to gamble on speculative tokens. Imagine how this message would land if it was produced by a casino.
President Biden issues a long-term Bitcoin price estimate:
Technically ticket scalpers are both market makers and rent seekers. Nothing in economics is ever simple enough for a newsletter. Just roll with me on this.