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Article 2

 The Physics and Mathematics of Business

By: Edward G. Engh (2013)

Assistant Professor, Salt Lake Community College

 

Physics is a science.  Mathematics is a science.  What about Business or Engineering?  Are they sciences too?  Academics make a distinction.  Physics and Math are sciences, but business and engineering are applications of science: they use the laws discovered elsewhere for their own reasons.  Sometimes there is a danger in using an application without remembering the source. Without keeping the source of an idea in one's mind it is easy to make false associations.  Every law of nature or theory of science comes with consequences; and these are not always taught.  Too often the student is left completely on their own to connect a formula with a consequence.  This sometimes causes us to misapply things.  For example, shown below is the formula for kinetic energy:

ke = ½[m(v2)]

Where: ke = kinetic energy, m = mass, and v = velocity

This formula above is a species of formula (in the mathematical sense) using algebra, like the formula financiers use for compound interest: shown below.

v = P (1 + r/n)nt

Where: v = value, P= the principle (or beginning amount or initial investment),  r = rate of interest, n = periods of times compounding occurs per period of time, t = number of years invested)

Kinetic energy is real, it exists in the Universe, it can be measured, quantified, maximized, minimized, etc.  Does this also mean that financial abstractions are real? Yes, but not in the same sense.  Value exists in the mind, whereas energy (like entropy) exist in the Universe. This may seem like a subtle distinction: it is like comparing love to gravity, one exists in the mind, the other everywhere.   Nevertheless it is very common to find people who treat the 'laws' of Finance (banking and mortgages) as if they were laws of nature!  They are not!  If one treats compound interest as if it were founded on physics there is great risk. If a nation makes important decisions on this kind of assumption, no one should be surprised if the results are not what was hoped for: collapsed economies, bankrupt companies, laid-off workers, defunct households.  As with Politics and political science, Economics is scientific, but it is not a science, even if it uses the tools of calculus.  It will remain a non-science until it adopts a fundamental theorem founded on empirical evidence, using the scientific method of hypothesis testing, in order to become a predictive tool.[1]  Every discipline suffers from this disconnection of consequence. 

Kinetic energy is real, but Capital is purely in man's head, it is not equivalent to kinetic energy. Too often this is painfully made clear when the books are opened in court, revealing that the capital (or wealth) was purely imaginary! Hind-site is always perfect 20/20 vision. Why do not we see these things in advance? How many times must we see many investors accept a purely abstract accounting of their capital? Seeing a mathematical formula often implies a mathematical law of absolute predictability. Kinetic energy can be predicted. As Einstein later demonstrated kinetic energy can even be magnified exponentially until one derives the famous formula E=m (c2). Physicists know that perpetual motion is not possible and that energy is not infinite, but investors treat capital as if it were perpetual and infinite.  Investors assume that their interest and capital are just as real as the laws of physics. They are not!  These errors may lead to war, recession, depression, and even to damaged ecosystems.  Value may be infinite in the mind, but the supply of fossil fuel in the ground in finite.  Building an economy on the assumption of infinite value sounds wonderful.  Who would argue against it?  If it rests on the assumption that fossil fuels are infinite there is some danger ahead.  Of course the danger may be ignored (or even denied) for a time.  

In the minds of humans, Finance and Economics may strive for equality with Physics and Mathematics; but these useful, clever and imaginative laws are not equivalent to those of science.[2]  What constitutes a science? Testable hypotheses, Predictable results, Precision, Accuracy: these are the hallmarks of a Science. Even so, science is always improving old theories. Another principle of science is this: no theory is perfect.[3] In science, we assume that human knowledge is imperfect, but imperfect knowledge is far better than total ignorance.   Every time a law of Physics is defined, it is inevitably shown to be in error by some factor. For example, it was once thought that Newton’s laws of mechanical motion also implied that the universe was completely predictable upon those laws. This leads to the hope that subatomic mechanics would work identically,  revealing that atoms were just little machines that work predictably . Every electron should then move in precise, predictable orbit around every nucleus. All this was proven to be false. Electrons are not completely predictable; in fact, this is a proof of the now widely accepted Uncertainty Principle.

The Uncertainly Principle is taken for granted by every science except those related to economics, such as business management. Why would a mathematician have the same faith in the value of his investments as he applies to sub-atomic particle predictions? He does not! It is shown here that he should not have any such faith. Some of the formulas used by scientists include values that are called ‘imaginary’ numbers. This is not the same kind of imagination necessary to believe in the value of an investment. In fact, they are completely different.  If the average investor knew of, or applied the uncertainly principle he would discount any promise of interest or value by as much as ninety-nine percent.

There are reasons for the confusion in people’s minds. One reason has already been mentioned, that most people imply a scientific basis to anything, which is calculated from a formula. The other reasons are more fundamental; require some historical background to understand, and then some awareness of the principles of Philosophy, and logic, and a little psychology.

The initial world of each person is based completely on perception. We perceive things before birth, though these are not recalled as memories afterward. Once we are born, we begin to store information and process it. Our perception is through five senses, seeing, hearing, touching, tasting and smelling. All information from these senses pass to the brain. Disconnect a sense from the brain and that sense is gone.[4]

Reality is quite different. It exists whether we are aware of it or not, whether we perceive it or not.[5]Most infants perceive early on that those orbs suspended above them contain food; and they are not aware of the monster lurking under the bed. They experience first hand perception of the one, and no evidence of the other. They will never perceive a monster, but they will hear of such things from others in authority, and they will trust them. There are no monsters. What we think we know is not always true. More important, there are things real, of which we have no perception. Other things are true even though we are ignorant of them.

This leaves us in a quandary. How can I be sure that I perceive things real? How can I prevent myself from mis-perceiving things, which are not real? A man named Epicurus pondered these questions 23 centuries ago; in Athens Greece, at that time a great center of learning. [6]   Epicurus saw that most people believed things that defy logic. Why should people worry about an afterlife, or beings of awesome power? He realized it would do no good to tell them they believed in ‘monsters under the bed’. He chose instead to explore the way people think; and he sought to perfect it.

Figure 1. The universe according to early science. Here is a model of Epicurus problem. It requires some nerve to look at it carefully, and ask all the necessary questions.

 

R  E  A  L  I  T  Y

R  E  A  L  I  T  Y

Something is Really TRUE

Something is Really FALSE

What you are THINKING in your head, based on your perceptions from the five senses.

See Hear Touch Taste Smell

You think it is TRUE

Correct Perception

TYPE 2 ERROR

believing something that is actually false.

What you are THINKING in your head, based on your perceptions from the five senses.

See Hear Touch Taste Smell

You think it is FALSE

TYPE 1 ERROR

rejecting something that is actually true.

Correct Perception

Figure 1. The Rational Universe.

Do I accept things that are not real? Are there real things, which I know nothing about? Could there be things harmful to me lurking out there? Some look at this situation and conclude that man is unable, or not meant to know some things. Others look at this and decide to improve their perceptions. Science follows the latter, doing all possible to minimize the possibility of mis-perception.

Tools are necessary to expand our ability to sense things. Man seems to have pursued tool making from ancient times. In fact we now define a culture by the tools it makes. Tools range from the first, most primitive machines; the plain, the lever, the pulley, the wheel, and the axle, to roads, cities, trade and warfare. A great tool is one, which systematically tests new tools; this is Science. Another great tool is one, which designs better tools, this is Engineering. Finally, there are tools, which efficiently build other tools for use; this is Manufacturing or Industry.

In spite of all these advances toward improved reality man is plagued by two problems; ignorance and attitudes, which linger for thousands of years, effectively retarding human progress. One cure for this is another tool, Education. Improved Education seeks to make all men reasonable; that is, it tries to guide all people to improve their perceptions of reality. This way humankind may be free from some of the effects of disease, early death, starvation or pain. Ignorance is treated with healthy doses of Education.

How do we cure the plague of human attitudes, which hold millions of people hostage? Throughout history people are led to build up massive cultural efforts as monuments, but many times in retrospect, these efforts seem to be founded on bad thinking. Sometimes they depart from common sense and wage war against neighboring countries. Sadly man is capable of such bitter attitudes that they lead to an ultimate false perception to destroy ones own people; this comes in many forms from genocide, ethnic repression, racism, complexes of gender superiority. 

Solving the problem of human attitudes is difficult but not impossible. Again, it starts with education. This means fundamental education of millions. Yet, it is very difficult to predict when a single ignorant man or woman will rise to persuade millions to pursue a destructive course. How many times must humanity suffer when just a few lunatics cleverly rise through the ranks of tolerance and democracy only to reveal their true colors after they are already firmly seated in power, which seemingly no one can defeat?[7]  

Reality can be misused by anyone, but it often happens with malicious, selfish or mis-perceiving people. Anyone who uses the facts, or the realities of life to misguide others is a powerful opponent, especially if the population is generally ignorant. Widespread ignorance facilitates the abuse of others, making it more likely for abusive people to rise to great influence.   Even the most well-meaning nations find they are bankrupt at some point in their history. By ‘national bankruptcy’, we mean a whole range of disasters.[8]   Ancient Romans believed the worst thing you could do is fight an unjust war. The gods would not bless such a war. For this reason they set up a democratic system of government, because they did not trust such decisions to kings or autocrats (no matter how many priestly robes they might wear).   In other words, the Roman idea of Justice made them very careful about putting people in charge, electing someone to lead. Many times this belief kept them out of trouble. However, it created another problem: if they happen to win a war, it must mean the war was just. This phenomenon lead to national arrogance and pride.  These problems still face humankind. The primary difference is that modern wars can kill billions. Thus if modern humans make poor leadership decisions, the hazards are very high . All of this could be studied by a disciplined scientific approach.  Presently Politics is outside of science, unpredictable and unreliable.[9]  Citizens are thus left with the crudest of tools to make the most delicate decisions.

After a thousand years of hard work and good luck, Rome eventually fell, not to overwhelming odds against barbarian invaders; but to plagues of ignorance and rising superstition. The disease  [10] was carried into the Empire by well meaning missionaries representing a new strain of monotheism.  Monotheism thus survived, while all that built by ancient Greece and Rome crumbled into ruins.  Monotheism turned into mono-intolerance.  To put it another way. Millions of people prospered under Roman law, and they benefited from the freedom to mingle and assemble in private conversation: but in the background, literally in the underground tombs called catacombs, millions of people began to believe that all their life-struggles were useless, in vain, even evil.  

How did so many people come to think this? They were taught that everything around them was a temptation. They were taught to moderate the evidence of their own senses. This life did not matter because this life is not the one that matters. This life is a lie, a trick, a deception, put forward to temp mankind into thinking the physical Universe mattered. It does not matter because the only life that matters is the next one.  It was all very unRoman.  They accepted it on authority that the next life is real, far more important than this one.  This led them to believe that civilization building is unnecessary.   Instead of using  debate and consensus, instead of using the evidence of ones own senses, they believed a new king was coming, a new world was imminent, and this was to be heralded by the appearance of the golden child, and his heralds were special people, not to be questioned.  Unquestioned belief in narrowly defined divine authority swept away all discussion.  The libraries were burned.  The colleges and academies destroyed, and the philosophers and teachers put to death.  All progress halted.  They soon forgot how to make concrete and cement.  They forgot how to navigate ships across the seas.  The world became flat in people minds, even though the ancient Greeks and Romans knew it was round.  None of this was to be questioned.

This makes it difficult to have a discussion. What is modern humanity supposed to do? Twenty-first century earth is a post-industrial, global society, but it is riddled with tradition, superstition and authority from a pre-industrial time. To get people to accept things without question: to put things beyond rational testing, modern systems of authority create a string of special punishments and rewards. This is a very old strategy.  They make it socially acceptable, then a social requirement. Teach them while they are young and impressionable, and make the belief system a precondition to sex. They appeal to their sense of pride.  Modern examples of authoritative societies control the system of education and the system of marriage. 

In other places where society is not controlled by an authority figure this is not so, people are not afraid of critical-thinking. In every society where people are opposed to critical-thinking, there is a dominant superstition dispensing education and marriage rights.  What example is more obvious than I.S.I.S. or Islamic State? 

In reality, civilization building is necessary. Business is civilization building, and civilization is business building.  Things must get done.  Society must profit.  Without it things begin to crumble back into the dust. This principle has a name in Physics: it is called the law of Entropy, or the Second Law of Thermodynamics. We either build up order in the form of Civilization, or we succumb to the laws of nature and decay.   Some people, not a majority, do not want to understand how nature works.  They also do not want others to discover how the Universe works.  Luckily this is a minority.  Some even prevent their children from getting a good education.  Fortunately you are here to get an education and will not be denied it.    There is great risk that while humanity is preoccupied by an unnatural struggle against understanding Nature, the dangers of nature herself may be ignored or obscured.  Climate change may be an example.  How strange that fossil fuels, which made the modern industrial revolution possible, should turn out to be a danger and a threat to our prosperity and survival?  How odd that we would use fossil fuels so vigorously that the generation that discovered them might also live to seem them run out.  To profit in the business of life we probably ought to use our best thinking.  That is what we teach.   How you use it is a choice, something you determine by your own free will. 

 FOOTNOTES:

[1] Game Theory, discovered by Dr. John Nash, et al, has opened the path to what may become a new science. Game Theory combined with a new branch of modern Biology may lead to the development of a predictive science of economy. It will have little or no resemblance to the old schools of Social Economics or Political Economy. Someday, those schools will seem as useful as alchemy is today, interesting, humorous in a tragic sense, until one remembers how many generations have suffered under the ignorance so often put forward as truth. As humanity progresses and discovers new things, old ideas often seen naive, but this is the nature of progress.

[2] Nations wage war over the firm belief in the so-called value of things: setting more value on capital than anything else, yet capital is not scientific. Unless there is a scientific justification for something, it is very hard to come up with a reason to support it.

[3] In science, something that is true is called a theory. Theory = truth.   A question is called a hypothesis.  Students must not use the word 'theory' in such a way as to imply the subject is not true. Speaking that way causes confusion. Nothing becomes a theory in science until it has been tested, again and again. If a student wants to refer to something untrue, or untested, they should use the word “hypothesis”.

[4] The range of our senses seems to be infinite until we begin to understand the world of science. Science displays a cosmos far beyond our ordinary senses, but well within our perception; if we use a tool to extend the power of our senses. Microscopes permit us to see the very small, telescopes the very far, distant or weak.

[5] The purpose here is not to be trapped in pointless rhetoric or worse, dialectics. Defenders of so-called soft sciences often cling to rhetoric and dialectic to suggest that all science suffers under the handicap of their own discipline. This is not true.

[6] The Encyclopedia of World History, Sixth Edition, Peter N. Stearns, General Editor, see under Epicurus.

[7] See Adolph Hitler, in The Encyclopedia of World History, Sixth Edition, Peter N. Stearns, General Editor.

[8] Disaster comes from an ancient word for ‘contradiction’, Dis; and the ancient word for ‘star’, Aster. In other words, star-crossed. Stars were believed to have influence in the affairs of humankind, because they might just be gods of some kind. Therefore, when two stars crossed each other it can only mean one of two things they are in love, or in conflict. Today a disaster is comparable to a type two error, thinking something is true when it is not true at all. “Someone will save us!” may be the sentiment of millions, but reality may be there is no one to save us but ourselves.

[9] At the present time, Political Science is anything but a predictive science, and therefore of very limited use.There is hope on the horizon.  A new science is budding inside the science of Biology, called the Science of Social Organisms.  This is very exciting.  Humans are not the only species to survive by working together in communities, there are many.  Scientific study of these phenomena is leading to incredible discoveries that some of these issues are determined genetically, others are determined cognitively, and yet others by the collective consciousness of the society.  This new science will likely displace the old political science.  The old political science is already a subset of history, Political History rather than a science.  The new discipline will probably be of great use in managing the roll of humans in wider biosphere.  Something similar is happening in other areas:  Psychology and Psychiatry are being replaced by Neuroscience.   What a fascinating world we live in?!  

[10] Gibbons, Edward, “Decline and Fall of the Roman Empire,” Vol? PP.?