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If World War I was the death knell of capitalism, the Great Depression was a punch in the face to anybody who had any doubts. Even with Keynes as the standard-bearer of Capitalism Viable, everybody was scouring old philosophers for new guidance. Karl Marx began to rear his ugly head as revolutionaries began a new sheaf based on his post-capitalist model.
We’ll start with the big names.
The first obvious name is Lenin. Russian history through World War I virtually guaranteed that his Bolshevik Revolution would become a reality, and events in the postwar world only gave strength to his already deep-rooted faith in the necessity to eliminate capitalism. He had three imperative questions:
-He struggled to answer the question of how to run the economy after he killed every business owner and manager – and unfortunately someone only asked after they were 70% done. Lenin was impressed with what he had seen from Germany during the war and sought to emulate their organizational system.
-He then faced the question of how to industrialize Russia very quickly, in the accurate realization that Communist Russia would be in for the fight of its life against a modern army, probably in its first 20 years of life. He went with Marx’s interpretation of British industrialization – capitalists waged war against peasants, stealing their land and forcing them to become a penniless urban class, then squeezing their labor and using the profits to create a cycle that enriched the state and fueled further industrialization. So that’s exactly what he did, using the Russian state as the sole capitalist and justifying it as necessary to create a military that would survive the next inevitable war with a motivated capitalist state.
-The final question was the survival of the state. Lenin operated the Communist Party as a state that faced the constant and imminent threat of annihilation. As such, he created a bureaucracy that was completely and utterly ruthless, motivated solely by self-preservation. He scoured the Party constantly to remove the weak, creating a job title that motivated workers like no other: breaking rocks in Siberia.
The next name is Hitler. Hitler also went by the book, following fascist philosophy and his personal philosophy to the letter. He created an appealing philosophy of group before the individual, spending his money on public works and rearmament. He forbade wage increases but justified it by outlawing unemployment. He only allowed foreign trade by barter, i.e. he shot anyone who traded with non-Germans. He also imprisoned dissenters, persecuted Jews, and kept people distracted with rants about foreign conspiracies against Germany. With petty behavior, it wasn’t difficult to scare up a few ugly comments about Germans whenever Hitler needed it. Bickering among the Allies during the Great Depression also made it easy to scare common citizens that the rest of the world was less than friendly. What’s remarkable is that Hitler was extremely popular, much more so than any politician in the West. Germans were delighted to have full employment, a new military that confounded the West, and plenty of minority groups to direct any frustration and anger.
We also have Stalin. He took Lenin’s brutal bureaucracy and industrialization to whole new levels. The most dangerous place to be in 1930s Russia was ironically the Communist Cadre. Of the 1800 that hailed Stalin after he exiled Lenin in 1934, fewer than 80 would hail him at the next Communist Convention in 1939. The rest were killed, in prison, or exiled to Siberian labor. No general of the Red Army in 1934 survived to see 1939, they were all shot. Stalin had three generations of proteges in the 1930s and ended up killing them all. Stalin’s sole creed: “You’d rather this than go back to the czars”. Even John Maynard Keynes, who found everything about Stalin to be detestable, had to agree.
The Great Depression is the most catastrophic event of the 20th century, and you might be surprised to find that it is still poorly understood, despite the fact that it is by far the most well-studied part of history of the last century. Critics are quick to call it an inevitable consequence of capitalism, although Friedman asked the pointed question that if this were a consequence of laissez faire capitalism, why didn’t we have more great depressions? Conservatives like Friedman are quick to turn the other way and blame government, saying that inept responses caused the Depression. Of course, you then have the equally itchy question that if the Great Depression were caused by stupid government, why haven’t there been more great depressions? We’ve never had a shortage of stupid leaders.
Here’s the Great Depression in outline form:
1929 – US at 3% unemployment
-August – “official” start of the recession. Industrial production begins to fall but stock prices continue to rise
-October – Black Thursday-Tuesday. Stock prices plummet, industrial production continues to slide
1930 – US at 9% unemployment
-June – Hoover signs Smoot-Hawley tariff, believing protectionism would save American jobs
-October-December – first banking panic
1931 – US at 16% unemployment
-January – Hoover decides “nothing” is the best policy, trying to let the system correct itself
-March-June – second banking panic
-September – Britain abandons the gold standard. In a rush, the Fed raises interest rates, believing it needed to encourage savings by propping up the value of the dollar, which would increase investment then consumption. Banks suffer a third panic that is short but hits the hardest yet.
1932 – Decline continues. FDR wins handily.
1933 – US at 25% unemployment
-January-March – banks suffer their last and final panic, which is also the worst.
-March – FDR takes office, declares a bank holiday and immediately pulls the US off the gold standard. The Depression’s recession is over. Things remain in bad shape, but the economy begins to recover.
So when we left, capitalism and democracy as drivers for freedom were as dug through and shot up as northern France. It was simply impossible to reconcile these philosophies as the optimal setting for everlasting peace when ten million boys lay dead in the mud of Europe’s battlefields. The vacuum of enlightened government was being filled with totalitarian philosophies. How did capitalism dust itself off and come back as a viable theory? Enter the life of John Maynard Keynes, the founder of macroeconomics, enlightened philosopher, and creator of the modern economy. The basis for fiscal and monetary policy, central banks, and exchange rates all come from Keynes. His life shows us the fatal flaws on the interwar period.
Keynes danced through Cambridge as one of its finest alumni, winning academic awards by the armful and being an esteemed patron of the arts. He hoarded knowledge and turned it into policy, writing papers and books that brought him to the attention of the British government. He worked in the government’s most prestigious offices, first the India Office as a bureaucrat then the British Treasury during World War I. While marshaling the British Empire’s resources for war, he became angry at what he saw as an enormous waste of money and men. He was furious that the politicians saw no other way through the mess than to pour more blood into the Marne.
His prominence to the British public came during the Versailles negotiations. He was so exasperated that he resigned his Treasury position and wrote a book called the Economic Consequences of the Peace, which is brilliant and scathing if you’ve ever read it. He could not believe that the Allies could not see that they would bear the major costs of the war, that wringing every last mark out of Germany while simultaneously demanding that the Germans rebuild their own country was pure folly. Keynes, as you might expect, was an arrogant bastard, so he thought he would use his new celebrity and his intellect to rebuild civilization from the ground up.
He spent the next fifteen years begging the British government to avoid disaster and failed miserably. He excoriated central bankers for caring more about restoring the gold standard than restoring trade. He tried to get politicians to care more about employment and stability than a return to pre-war standards. He did his best to get Britain to avoid the new gold standard and then to avoid an overvalued peg. He achieved none of these. Even after 1930, he failed to convince anyone that the Great Depression was a man-made catastrophe that could have been prevented by governments rather than caused by them (that job would be left to Milton Friedman).
His contributions wouldn’t be noted until the end of World War II. He left behind proposals for an international gold standard that would be the basis for the Bretton Woods agreement. He also had a hand in creating the World Bank and the IMF. His theories about fiscal policy would only be considered by America when it was a bankrupt country looking for a way to pay for a new war.
Hundreds of millions of people will die and billions will suffer the consequences of war, depression, fascism, communism, and ethnic cleansing. You also have to cynically note that Serbia and Bosnia in 1914 were blood brothers willing to fight a hopeless war against the Great Powers together, but by 1999 they can’t co-exist in the same space without both sides trying to exterminate the other. They fight a war at the beginning of the 20th century in the name of unification, and fight a war at the end of the 20th century in the name of separation. If there is a God, Yugoslavia is his sickest and cruelest joke.
If you don’t know what I’m talking about, I’m talking about a Bosnian terrorist shooting Archduke Ferdinand I of the Austro-Hungarian Empire because he wants Bosnia to be independent so it can join with Serbia. Austria demands an apology and a confession that Serbia instigated it. They get it, then say that isn’t good enough and mobilize for war. Czar Nicholas II of Russia, never one for good decisions, sees an opportunity to help his Slavic brothers out and take control of the Balkans, so he mobilizes his army for war.
Kaiser Wilhelm II of Germany also sees a good chance to increase the prestige and influence of central Europe and remove the long-standing thorn that is the Russian czar. Wilhelm is also eager to disprove critics who say he can’t fill Bismarck’s shoes, so he enthusiastically orders the German Army to mobilize. Unfortunately, he doesn’t understand that Bismarck left behind a military culture in which “mobilize” meant “war”, that part of Germany’s preparations for war include securing its weak flank because mobilization to the generals means Germany’s leadership thinks that war with Western Europe is inevitable. He wants the army to mass and does not declare war, but Germany’s political leaders realize they’re at war when they get reports that the German Army has captured the Belgian border fortress at Liege, and France and Britain have declared war on them.
World War I is that stupid.
Mobilization of resources were surprisingly slow in World War I, especially considering that all of the Great Powers had anticipated just such a war for decades and all had war plans for specifically this contingency. The beginning phase of the war looked very good for the Central Powers, until they outran their supply lines and settled into trenches to avoid flying death from machine guns. Every government tried to run some variation of a command economy, each believing that a centralized authority could directly control economic resources for war. You see varying results, from Russia spending itself into nonexistence to Germany mobilizing so well that it inspired Lenin that government should control the entire economy all the time.
The aftermath completely changed the face of war, economics, and history. This would be the last war in which more soldiers were killed than civilians. It was the first time that the major costs of war were born by the winners, not the losers. The Treaty of Versailles demanded “reparations” from Germany, money that the Allies would never see and would eventually have to pay themselves. France waited patiently for 2.5 years’ worth of GDP to be paid by Germany and Russia for war debts, money that would be repudiated by the Nazis and the Bolsheviks; 15 million citizens died of starvation and influenza while they waited for the check. The end of World War I also meant the end of European monarchies, as dynasties collapsed and abdicated their powers to parliamentary democracies (power given to returning generations of fighting men), some of which gave way to absolutist groups like the communists and fascists.
Citizens would no longer blithely believe that progress, evolution, and utopia were functions of Adam Smith’s invisible hand. It is impossible to look through the history of World War I and come out as a liberal believer in peace as a default condition for humanity, the benevolence of the market, the eventual triumph of reasoned discussion, or that equilibrium for humanity is an inevitable upward rise. Capitalism had to go back to the drawing board, muddling through and trying to cobble together some kind of new cohesive theory that looks kind of like pre-World War I philosophy but make it true in practice, even if it doesn’t always make sense.
After the turning point of 1870, there was no looking back for the West. Communication and transportation became interdependent in creating global demand on an unprecedented scale. London could get news from any part of the globe, and this fed British demand for foreign goods, for everything from Chicago wheat to Chinese tea to Argentine wool.
Science also fed economic growth. Whether or not you believe in the theory of evolution and Mendelian genetics, they were undeniably world-shattering events, as they provided a scientific basis for transplanting cash crops around the world rather than simply looking for natural resources. Rubber trees were introduced in Malaysia, tea became an Indian export, rice was introduced to the Americas, lambs to Australia and Argentina, etc. Europe reorganized the world by trade route and empire.
The maturation of economics, math, and statistics meant that people started caring about measures of economic growth. Issues like wages, unemployment, productivity, and living standards emerged as people slowly realized the implications of business activity. Adam Smith was finally proved to be mathematically correct that international trade provided a real basis for economic growth, as wages around the British Empire rose except in Australia.
However, you also begin to see the real implications of inequality and technology. Invention and factory tools meant that it was cheaper to buy steel from an American factory than from a bunch of Chinese laborers. Which meant American factory workers got rich while Chinese laborers desperately tried to find rides to America. Only in the early 20th century, when economies became increasingly industrialized and mechanized, do you start to see drifts toward cheaper labor again.
Weirdly enough, attempts to industrialize what is now the Third World failed everywhere except in Japan. Indians, Chinese, Mexicans, Egyptians, Malaysians, etc, simply could not grasp the modern institutions to sustain an industrial economy. In fact, many of them still don’t today. One of the issues in economic history is how these countries could produce a management class that specialized in plantation agriculture and so magnificently fail to produce management that could control an industrial workforce. After all, controlling a factory requires just a little more technical skill and brains but not nearly as much effort in monitoring and disciplining plantation workers. The best theory so far is that it is extraordinarily difficult to teach someone to do factory work if they have no familiarization with operating machines. It must also be noted that nativists in Europe and America largely won out in blocking immigration from Asia, severely slowing down the rate at which Asian populations could have familiarized themselves with Western laws and technology (all of Asia’s modernist leaders in the 20th century lived and were educated in Europe or the US, from Gandhi to Deng).
Again, we turn to the incredible failure of China as an example. It is surprising that industrial technology did not spread more quickly before World War I. After all, China had patent proof staring them in the face that an agricultural economy could never produce an army that could stand on the same battlefield as an industrial one. It obviously had nothing to do with race either, not when Meiji Japan bitch-slapped the Chinese navy and went on to take down the Russians. China’s leadership showed an absolutely incredible stubbornness in refusing to adopt steam engines, coal, screw propellors, iron hulls, cannons, or railroads. Part of the story can be explained by appalling corruption in the Qing bureaucracy and by an extreme skepticism of Europeans after the unequal treaty era. This led to the Qing dynasty perhaps holding China together only with a couple ass hairs, giving them little public capital to spend and no faith in Western investment after the last deal, when Europeans had traded all of China’s gold for opium.
The single personification of everything I just said is the gold standard. It required quick communication around the world, good reliable transportation of money, maturity in finance and math, and it quickly created global wealth and inequality. Gold made the haves and have-nots – America was a have because of the California gold rush, China was not because it traded all its gold for opium.
Pegging currency to gold was the only way to prevent arbitrage (manipulating currency spreads) and created discipline by governments around the world. In a multipolar world where everybody viewed other countries as rivals and didn’t trust anybody, bilateral economic deals were nonexistent and countries could only trade through their mutual faith in gold. For instance, Argentina found itself dissatisfied by having a currency overvalued in gold and tried to alter their peg. This resulted in immediate outcast from trade with the British Empire, which reduced Argentina from the 8th largest economy in the world in 1890 to just another broke-ass Latin American country by 1990 (with 27 defaults on its national debt).
However, gold had the downside of transmitting financial crises around the world as quickly as the telegraph cable could carry it. American railroad construction rose and fell with news from London about the status of gold, while American debates in the 1890s about a possible switch to a bimetallic economy (incorporating silver) caused a near-crash of the London stock exchange. Both of America’s big crashes in 1873 and 1907 were directly caused by news from Britain raising interest rates, drying up the supply of gold for capital investments.
There is no disputing that China prior to the Industrial Revolution was the world’s biggest and most powerful state. At the turn of the millennium, it had distinct advantages in technology, government, and organizational ability. After the Mongol invasions of twelfth century, China began 750 years of decline, culminating in 1870 when Europe began the unequal treaty era and carved China up like a Christmas turkey. What happened?
For one, military power. Chinese leaders feared military power after their experience with the Mongols, relegating generals to marginal roles. In particular, Chinese bureaucrats feared their own generals much more than foreign ones. This is in stark contrast to Europe, who craved military power and held their great generals in the highest esteem, primarily because Europeans were almost constantly at war with each other and greatly feared their neighbors. Europeans feared the next William the Conqueror, Charles V, or Napoleon, while China feared the Songs and the Qings.
Second, uncuriosity. While Europeans were fascinated by Chinese technology, the Chinese viewed European inventions like glass and muskets with disdain, even contempt. This may have been a result of being too good early on, as Chinese bureaucrats didn’t think they needed any new technology that made mining or harvesting crops easier, and thought studying the classics was the highest honor. There was never any conception for new organizational institutions like banks or universities, the Chinese bureaucrat simply thought investing and research were beneath him. Most importantly, this led to an extraordinary ignorance about the outside world.
Third, Malthus. Economic stagnation and using the same methods in 1800 to harvest rice as in 1200 but with the higher population meant China was in crisis. Caloric intake isn’t measured, but records show the average Chinese by 1870 was shorter than five feet. Improved European sanitation and eating meant their average height was around 5’6″ and finding men above six feet was not uncommon. Europeans who arrived in the mid-1850s also found a country crippled by peasant revolts and food strikes.
Perhaps the best example was the Taiping rebellion. For 15 years, Europeans came in their steam ships with modern cannons and better tactics, watching with bemusement and a growing confidence as incompetent Chinese bureaucrats led even worse armies in essentially mob combat against peasant villages. Perhaps 10 million people, 3% of China’s population, were eventually killed in the war, but the Qing dynasty emerged victorious, delaying modernization for another half century.
The turning point in economic history is 1870. That is the focal point at which transportation, communication, and human invention were sparked in a way that totally revolutionized the economy. Some examples:
-In 1870, Isambard Kingdom Brunel’s Great Eastern (the largest ship ever built until 1901) lay the undersea telegraph cable from Yemen to Bombay, completing a single line from London. Rather than months for news to go from London to Bombay and back, after 1870 it only took minutes.
-The first tangible economic use of this happened only a year later, when American financier J. P. Morgan joined Anthony Drexel in forming an investment bank, in charge of brokering deals from capital-rich Britain to resource-rich America. This was possible by the telegraph, which allowed them to control and monitor their investment on a daily basis.
-For transportation, a shipyard in Belfast launched the first steam-powered, screw propeller ship, the RMS Oceanic. The transatlantic journey from Liverpool to New York took 9 days and cost $15, a month and a half’s work for the average factory worker. It was one-third the cost in time and money from only a generation earlier during the Irish Potato Famine, which meant the trip was much more accessible and many more people were likely to survive the voyage.
-Going the other way, refrigeration began to be in wide usage in 1870, allowing exports of grain from the New World back to Europe. The cost of a pound of flour plummeted by half after 1870. Combined with migrations of Europeans to America, Malthus was soundly disproved.
-By 1870, the Industrial Revolution was in full swing. There isn’t a single invention to name that caused it, but a surge of inventive activity, especially in Great Britain. Developments in metallurgy, electricity, steam, math, finance, physics, chemistry, medicine, and biology all flowed out of universities and scientists. The common worker could finally dream of high consumption.
-For the common man, the two most important sections come in electricity and medicine. Both meant that people were able to earn more with less effort, and were much less likely to die from smallpox, cholera, dysentery, etc. Being less likely to die and having more energy, naturally, meant more children. And that’s exactly what you see, a population boom in Britain originating from the 1870s and traveling around the world as these benefits were spread.
A series from FKN that I did, based on Professor DeLong’s Econ 115 lecture notes and audio files at Berkeley.
One of my favorite professors at Berkeley has made his class notes for a course in economic history of the 20th century public, because the network they use at Berkeley sucks and they wiped out everything on their servers to make space because of budget cuts. But that’s good for us because I’ll post summaries of his notes here, along with some essays that he’s assigning as thought-provoking exercises.
He also had a nice inspirational speech reminding his students that they attend the University of California, Berkeley, the finest public university in the world, the most prestigious research institution in the world, and maker of the future rich. The class is designed to cram as much information and creativity in thought as humanly possible, because this crisis has reminded us if nothing else that talent is always in short supply and the sheep are always one step from being slaughtered.
The course makes five big points:
-economic history is the important history. The 20th century saw changes that rocked everything that people ever knew about the world to its very roots.
-there was a very recent explosion of global wealth
-this has also caused a very recent explosion of global inequality, which the world has been increasingly and acutely aware of
-most of this is rooted in tyranny. Oddly enough, not based on religion, military, or political strength, but roots in philosophy about how to distribute goods in society.
-governments face the enormous task of walking the balance wheel to success. Needless to say, it often failed.
To whet your beak and get you thinking:
Most economics departments in the United States (including Berkeley) make a big deal about capitalism and how global competition has increased standards of living drastically. We take it as largely an assumption that free trade, democracy, and liberal rights (i.e. education, health care, housing, etc.) make a country prosperous.
But consider the example of India, which has been closely integrated with the British for the last 150 years. They’ve had all of those things and yet no prosperity. Things are slightly better now but they’ve struggled greatly next to China, which has a command economy, communism, and very few rights. China has had much less intimate contact with Europe, and 50 years ago had fewer roads, railroads, telephone lines, steel, schools, hospitals, factories, temples, doctors, engineers, lawyers, soldiers, and citizens than India. China was also devastated by World War II while India was untouched. So what happened?
As another example, North Korea had a comparable and even superior rate of economic growth compared to South Korea until the 1980s. Both the USSR and US dropped their economic aid programs to Korea around 1988, yet Seoul thrived in the global economy while Pyongyang withered. What explains these differences?
Sort of a bad title, but here are the stages, courses, and best textbooks that I find are necessary to advance oneself through the world of finance. Mastery of a stage can be assumed by passing certain standardized tests or through the more obvious path of passing the class in school. Standardized tests have the advantage of being uniform where academic standards can be different between schools or professors, while school or work provides a better structure to prove your competence or find a niche. Most university curricula are centered around pushing students through each level in a year or so. Students are expected to develop their learning capacity and discipline so as to accommodate the more difficult and larger workloads that higher levels require.
This is really just for me to create a structure for myself and hopefully lay the groundwork for a neat tree diagram which will make my goals clearer. It borrows heavily from a guide to being a pure mathematician, Amazon, and a variety of other sources on Google. I’ll use the level system to provide a basis for difficulty. Level E is fresh out of high school level, going up to A, which would be doctorate level. There will also be level S for those extraordinarily difficult subjects that are unnecessary unless you’re a masochist, an inventor, or a fraud.
Level E/D – Elementary stuff: calculus, probability, economics
This is for the intro level courses where professors are correcting bad habits learned from high school, where reasoning was usually just a lot of hand-waving and magic. For most students, this means taking a modestly formal class that teaches complex numbers, systems of equations, limits, delta-epsilon proofs, exponential functions, independence, conditional probability, expectation, and the basics of supply and demand. For people who want to learn programming, discrete math will lay the foundation for logical thinking. Learning these topics is crucial later on – gaps in knowledge about calculus or probability will really hurt when the math gets much heavier.
Standardized tests: SAT, AP exams
Spivak – Calculus (probably the best and most rigorous book out there)
Stewart – Calculus: Early Transcendentals (the standard with pretty pictures and lots of problems, but not the most rigorous mathematically)
Hardy – A Course of Pure Mathematics (if you really want to sharpen your logical skills)
Anton and Rorres – Linear Algebra with Applications (first few chapters)
Chung – Elementary Probability Theory (the best, although Ross is also good)
Mankiw – Principles of Economics (good standard text, but lots are pretty good)
Halmos – Naive Set Theory (very difficult but good for proofs and set theory)
Graham, Knuth, and Patashnik – Concrete Mathematics: A Foundation for Computer Science
Level C – Beginning the Education: linear algebra, multivariable calculus, statistics, micro/macro-economics
Most universities structure their math requirements to encourage students to choose their specialty, but this allows them to neglect portions that may be important. A balance should be struck between finding one’s strengths to choose a major and building a proper foundation for higher education. This is the area that is most dangerous, because a lot of authors and professors like to go back to the bad habit of hand-waving rather than making students take the difficult transition to rigorous and formal thinking. If you got the books from Level E that I suggested, most of them are good enough to carry you through here too. Topics to focus on are vectors, linear transformations, matrix algebra, orthogonality, double/triple integrals, Green’s theorem, Fourier series, basic hypothesis testing, distributions, maximum likelihood estimators, marginal cost/revenue/benefit, market structure, business cycles, and exchange rates.
If you’re programming (and sooner or later you’ll have to learn this), you should be learning how to use Excel, Access, and maybe a programming language; you should be able to know what programs and components are good and bad for your computer and how to fix minor problems.
Standardized tests: real estate exams, GRE/GMAT (math portion)
Apostol – Calculus Vol 2 (very dry and technical, but very good – better than Stewart, which will get you here too)
Boyce and DiPrima – Elementary Differential Equations and Boundary Value Problems (the standard text along with Anton and Rorres)
Freedman, Pisani, and Purves – Statistics (excellent overview of all topics in probability and statistics)
Ott and Longnecker – Statistical Methods and Data Analysis (good overview of statistics with a hands-on approach)
Ross – A First Course in Probability (pushes you farther than Chung)
Varian – Microeconomics (not the most intense but the best conceptually)
Mas-Colell – Microeconomic Theory (the most intense, for serious economists only)
Mankiw – Macroeconomics (the easiest to read and understand)
Level B – Mature education: analysis, statistical inference/computing, finance, accounting
This is it. The honest start of your education. Don’t expect “plug and chug” to work any more, because you have to know what you’re doing and why. This is an intense part of the field, because finance and accounting involve cramming a LOT of stuff into your brain. At this point, authors will often skip steps and calculations with the dreaded note “trivial proof left to reader”. It sounds mean but the serious student will spend the time understanding why it’s trivial by filling in the gap. It is a tool that will serve well later on when presented with new ideas, which must be critically regarded. If you have been, you should stop being impressed with resumes and school names, because you do not want to be brow-beaten into beliefs just because someone from Harvard treats you like an idiot. If their ideas don’t flow logically, then you should learn to identify it and point it out. Mastering this level would provide a strong foundation for graduate school and most likely marks the end of an undergraduate career. Topics covered are metric spaces, compactness, measure theory, Markov chains, parametric and non-parametric tests, time value of money, financial ratios, capital budgeting, managerial decisions, and derivative products.
On the programming side, you should know how to build and maintain a network, how the internet works, and feel comfortable with a programming language and/or software packages such as R. You want to be very strong at C++, Java, Matlab, or R. Don’t spread yourself thin learning a little bit about all of them.
Standardized tests: CMA (first 2 levels), Actuarial exams P and FM, Series 7
Ross – Introduction to Probability Models (a more thorough version of his other book, esp. introducing stochastic processes)
Rice – Mathematical Statistics and Data Analysis (lots of good illustrations and lots of gaps in proofs – if you do not have a good grounding in statistics, you will get hammered)
DeGroot and Schervish – Probability and Statistics (detailed explanations and points out common misconceptions)
Rudin – Principles of Mathematical Analysis (Baby Rudin, but still not for the faint of heart)
Brealey – Principles of Corporate Finance (a Bible in the field for MBAs and finance students)
Hull – Options, Futures and Derivatives (a common text, weak on math but a good introduction to derivatives)
Joshi – Concepts and Practice of Mathematical Finance (best intro book out there)
Horngren and Harrison – Accounting (another great intro book, but this is a wide open field)
Garrison, Noreen, and Brewer – Managerial Accounting (best budgeting text out there)
Level A – Grad school/Pro: regression, time series, martingales, modeling
These are the bread and butter tools that analysts and bankers use to make financial decisions. It can be mathematically rigorous but the real skill is to turn these advanced concepts into readable facts by the average person or more importantly, convenient packets of numbers for accounting purposes. These are extremely powerful in the right hands, as can be seen with examples like Enron and the housing bust, and if you didn’t follow my advice before about being impressed with resumes, it’s easy to be convinced that what you’re doing is very profitable, very effective, and very safe. The necessity for rigorous thinking here is absolute, because the translation from tremendous mathematical data into simple fact means that there’s a lot of room for error, misconception, and poor understanding. Remember that if statistical results seem to fly in the face of common sense, they’re probably wrong. Always moderate your faith in science with a healthy dose of non-mathematical skepticism. But if you’ve reached this level, you’ll have a graduate degree and/or a well-paying job.
The topics I listed above are the ones that best relate to advanced statistics and mathematical finance, but it’s very possible to have gone the less mathematical route through business school or law school. If you’re still programming at this point, you should build your own start-up or sell your programs.
Standardized tests: CPA, CFA, EA, NASD Series exams, bar exam
Casella and Berger – Statistical Inference (text used widely in grad school)
Kutner, Nachtscheim, Neter, and Li – Applied Linear Statistical Models (THE book on regression)
Tsay – Analysis of Financial Time Series (not easy, but a great book)
Chung – A Course in Probability Theory (the adult version of his elementary work)
Williams – Probability with Martingales (not an intro prob book, but an intro martingales book)
Chung – Introduction to Stochastic Integration (read and digest Williams first, or you will regret it)
Level S – Mathematicians/Physicists with a career change: interest rate modeling, credit derivatives, numerical techniques
The list is pretty much over, and you’d only learn this stuff if you were a quant, Einstein, or trying to commit suicide with math. At this point, you would be beyond exams because you would almost certainly have a PhD. Proving yourself at this point is a matter of accomplishment, publications, or millions of dollars. If you wanted to swindle the investing public, it is probably not difficult for you to scare up billions of dollars. You don’t fear Congressional subpoenas or the Supreme Court of the United States. Even for the so-called Masters of the Universe on Wall Street, the prospect of seeing those things makes their testicles shrivel into their abdomen.
Just remember that nothing hits harder than the ground. If something goes wrong and you melt down the US financial system, your career is effectively over and you should plan to die before you ever see the inside of a federal penitentiary (e.g. Ken Lay).
Brace – Engineering BGM (Brace is the “B” in BGM, because he invented the LIBOR market model that forms the basis for global capital flows. Brace believes in “less is more” when it comes to explaining things, which is why he’s smarter than you are.)
Schonbucher – Credit Derivatives Pricing Models: Models, Pricing and Implementation (an explanatory text for pricing credit derivatives, a booming industry before the financial system went belly-up, so either it’s all junk or everyone was doing it wrong)
Glasserman – Monte Carlo Methods in Financial Engineering (definitive reference on Monte Carlo methods in finance)
Level 0 – Nonessential reading and movies
If you want to know about the trials and tribulations of working in finance, here are some great books. A lot of these are cautionary tales about taking mathematical models too far and the excess of both work and play in the financial world.
Derman – My life as a quant: reflections on physics and finance (takes you through his career in physics and finance, and he lived through some very interesting times and was an interesting character. You see the egos in Wall Street and the vicious schadenfreude.)
Lewis – Liar’s Poker (shows the excess of Wall Street in the 1980s. Read by everyone who’s ever wanted to get in the money game)
Lowenstein – When Genius Failed: The Rise and Fall of Long Term Capital Management (story of statistical models blowing up a hedge fund. Not an exact sequel but a lot of overlap with characters from Liar’s Poker)
Taleb – Fooled by Randomness/Black Swan (two books, first details that most skill is masking extraordinary luck, second shows you that most mathematical theory and science is a house of cards built on sand. Writing is turgid and repeats itself ad nauseum, but it’s worth reading if nothing else to provide an exercise in why you think Taleb is an incredible douchebag)
Enron: Smartest Guys in the Room (documentary about the end of Enron. You get to see that incredible assholes are common in finance and how tenuous the system is between statistics, economics, and law when placed in the hands of very smart and very greedy people. The money game attracts sharks and most regulators and lawmakers are just blubber)
President Obama held a press conference last night to shore up support for his health care reform bill. I thought he did a great job politically of managing the questions and getting people enthusiastic about the issue. However, I did notice a couple things, like the fact that his answers to hard questions ramble on until he forgets what was asked in the first place and that he knows absolutely nothing about economics. Also, his speeches are very formulaic. They’re effective and make people think he’s a genius, but there is a formula to it. So I unveil to you, the anatomy of an Obama speech:
1) “I’m your knight in shining armor. I saved America with hope”
Now, six months ago, I took office amid the worst recession in half-a-century. We were losing an average of 700,000 jobs per month, and our financial system was on the verge of collapse.
As a result of the actions we took in those first weeks, we’ve been able to pull our economy back from the brink. We took steps to stabilize our financial institutions and our housing market. And we passed a Recovery Act that has already saved jobs and created new ones, delivered billions in tax relief to families and small businesses, and extended unemployment insurance and health insurance to those who’ve been laid off.
Of course, we still have a long way to go. And the Recovery Act will continue to save and create more jobs over the next two years, just like it was designed to do.
2) Hate the rich, they made America fat and lazy
I realize this is little comfort to those Americans who are currently out of work. And I’ll be honest with you: New hiring is always one of the last things to bounce back after a recession.
And the fact is, even before this crisis hit, we had an economy that was creating a good deal of wealth for those folks at the very top, but not a lot of good-paying jobs for the rest of America.
It’s an economy that simply wasn’t ready to compete in the 21st century, one where we’ve been slow to invest in clean-energy technologies that have created new jobs and industries in other countries, where we’ve watched our graduation rates lag behind too much of the world, and where we spend much more on health care than any other nation, but aren’t any healthier for it.
3) The common man has suffered, or If you don’t like Obama, you want everyone to die writhing in agony
That’s why I’ve said that, even as we rescue this economy from a full-blown crisis, we must rebuild it stronger than before. And health insurance reform is central to that effort.
This is not just about the 47 million Americans who don’t have any health insurance at all. Reform is about every American who has ever feared that they may lose their coverage if they become too sick, or lose their job, or change their job. It’s about every small business that has been forced to lay off employees or cut back on their coverage because it became too expensive. And it’s about the fact that the biggest driving force behind our federal deficit is the skyrocketing cost of Medicare and Medicaid.
So let me be clear: If we do not control these costs, we will not be able to control our deficit. If we do not reform health care, your premiums and out-of-pocket costs will continue to skyrocket. If we don’t act, 14,000 Americans will continue to lose their health insurance every single day.
These are the consequences of inaction; these are the stakes of the debate that we’re having right now.
4) Promises – Elaborate promises that are the adult version of coke in every drinking fountain
If you have health insurance, the reform we’re proposing will provide you with more security and more stability. It will keep government out of health care decisions, giving you the option to keep your insurance if you’re happy with it.
It will prevent insurance companies from dropping your coverage if you get too sick. It will give you the security of knowing that, if you lose your job, if you move, or if change your job, you’ll still be able to have coverage.
It will limit the amount your insurance company can force you to pay for your medical costs out of your own pocket. And it will cover preventive care like check-ups and mammograms that save lives and money.
Now, if you don’t have health insurance or you’re a small business looking to cover your employees, you’ll be able to choose a quality, affordable health plan through a health insurance exchange, a marketplace that promotes choice and competition.
And, finally, no insurance company will be allowed to deny you coverage because of a pre-existing medical condition.
5) Token gesture. His plan will cost trillions of dollars, but look, he saved a couple pennies!
Already we’ve estimated that two-thirds of the cost of reform can be paid for by reallocating money that is simply being wasted in federal health care programs. This includes over $100 billion of unwarranted subsidies that go to insurance companies as part of Medicare, subsidies that do nothing to improve care for our seniors. And I’m pleased that Congress has already embraced these proposals.
6) Slap Republicans. Imply they’re the cause of the problem.
I understand how easy it is for this town to become consumed in the game of politics, to turn every issue into a running tally of who’s up and who’s down. I’ve heard that one Republican strategist told his party that, even they may want to compromise, it’s better politics to “go for the kill,” another Republican senator that defeating health reform is about “breaking” me.
So let me be clear: This isn’t about me. I have great health insurance, and so does every member of Congress. This debate is about the letters I read when I sit in the Oval Office every day and the stories I hear at town hall meetings.
7) Tears. Tell sad anecdotes
This is about the woman in Colorado who paid $700 a month to her insurance company only to find out that they wouldn’t pay a dime for her cancer treatment, who had to use up her retirement funds to save her own life.
This is about the middle-class college graduate from Maryland whose health insurance expired when he changed jobs and woke up from the emergency surgery that he required with $10,000 worth of debt.
As an aside, what percent of his anecdotes do you think are fake? He doesn’t say names or use any way to verify their identity, so it wouldn’t be hard to fabricate. I have a friend in New Jersey who’s a doctor, and he thinks medicine should focus solely on underlying problems and not just treating the symptoms. His own practice has been extremely successful doing just that. Yeah, his name is Dr. Gregory House. See how easy that is? I could even plausibly say I wasn’t lying.
But check out any of his speeches and you’ll see all of these elements in there.
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