The Physics of Wall Street: a brief History of Predicting the Unpredictable

A New Manhattan Project 
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their own) would retire, and the costs of providing them with benefits 
would rapidly outstrip the program’s ability to fund itself.
And yet, there was little to be done. for a politician to draw attention 
to Social Security’s woes was suicidal. the two obvious solutions to the 
funding problem — reducing benefits and raising taxes — were equally 
unappealing. Social Security presented a kind of political catch-22 —
that is, until daniel Patrick Moynihan and Bob Packwood, the two 
leading members of the Senate finance committee in the mid-nine-
ties, shared a moment of inspiration. If you wanted to come up with 
$1 trillion without anyone noticing the difference, all you needed to do 
was change the value of money.
Here’s how the plan worked. Projections for the future costs of So-
cial Security were based on the expected rate of inflation, which in 
turn was based on the cPI. Moynihan and Packwood realized that 
if the official rate of inflation could be lowered, the income from the 
Social Security tax would rise, and the costs of administering the pro-
gram would fall. the effect would be to raise taxes and reduce entitle-
ments, relative to the real buying power of money, without acknowl-
edging that you were doing so. the challenge was to find an argument 
for why inflation calculations should be modified. this is where the 
Boskin commission came in. It was a masterful sleight of hand. Work-
ing backward from the figure of $1 trillion, which Moynihan believed 
would be necessary to keep Social Security solvent, he and Packwood 
determined that inflation would need to be reduced by 1.1%.
According to notes written by robert Gordon, an economist at 
northwestern University and one of the five members of the com-
mission, dale Jorgenson — the Harvard economist who had thrown 
Malaney out of his office — reported to the commission early on that 
they were aiming for $1 trillion in Social Security savings over ten 
years, and that this meant they needed to come up with the requisite 
reduction in inflation. then the committee broke up into two teams to 
work on different ways in which the problems of changing preferences 
and changing quality could affect cPI. Gordon and the other person 
on his team, working together, arrived at one number. the other team, 
which included Jorgenson and Boskin, arrived at another. And then, 
“somehow” (Gordon’s word), when the two teams combined their re-

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sults, the commission’s final recommendation “corrected” inflation by 
precisely 1.1%.
the Boskin commission’s findings were criticized from all cor-
ners. As Gordon later reported, the project was rushed and careless. 
He and his collaborator finished their contribution days before the 
commission was due to present to the Senate. the calculations were 
what physicists and economists both call “back of the envelope,” little 
more than informal estimates. the commission’s report was never 
peer-reviewed before it was presented to the Senate. none of the other 
members of the commission ever asked how his team had come up 
with their number, or how the others had arrived at theirs. the answer 
to such questions would have inconvenient. (Ultimately, many of the 
Boskin commission’s recommendations were squashed by effective 
lobbying on the part of the AArP and others; about five years later, 
the national Academy of Sciences and the U.S. Bureau of Labor Statis-
tics returned to the problem of how to calculate the cPI, with a more 
intellectually rigorous approach, and with more nuanced findings.)
Malaney approached Jorgenson with her and Weinstein’s ideas 
about index numbers soon after the Boskin commission was formed. 
Jorgenson may have had deep criticisms of Malaney and Weinstein’s 
proposal. they may have even been good criticisms. But it is hard 
to avoid guessing that it would have caused problems for the Boskin 
commission had a new and mathematically rigorous method emerged 
for calculating precisely what they were tasked to calculate. It seems 
the easiest thing was to make Malaney and Weinstein go away.
exporting gauge theories, or other ideas from physics, to econom-
ics remains a hard sell. Weinstein was right that late 2008 presented 
a unique opportunity for someone inclined to change the way econ-
omists thought about the world — and the world, economics. Many 
people in finance, in economics, and in ordinary homes around the 
world were scared. things that many people thought they understood 
turned out to be changing and unreliable. Meanwhile, people working 
in other fields, such as physics and mathematics, saw an opportunity 
to contribute to a field that seemed besieged. the suggestion that it 
was time to reevaluate some of the principal theories and methods of 
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A New Manhattan Project 
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modern economics struck a chord with many, including Smolin and a 
handful of other physicists working at Perimeter.
Smolin, who previously had been reading up on economics in his 
spare time, began to consider working on it more seriously. He col-
lected notes he had written on various topics, including his take on 
Weinstein and Malaney’s proposal, and put them together in a paper 
that he then posted on an online archive where physicists post new 
research. the paper was a kind of translation dictionary, explaining 
basic economics to physicists and then showing how ideas that physi-
cists were already comfortable with could be applied to this otherwise 
foreign science.
Meanwhile, Smolin and Weinstein began organizing a conference 
to be held at Perimeter. It was scheduled for May 2009. the plan was 
to invite representatives from across the spectrum of economics, with 
a goal of bringing together a diverse and heterodox group of people 
to discuss how to move the field forward in light of the recent crisis. 
Weinstein and Smolin participated, but so did others, such as doyne 
farmer and emanuel derman. Mainstream economists were also in-
vited, such as nouriel roubini of new York University, Barkley rosser 
of James Madison University, and richard freeman of Harvard, as 
well as nassim taleb. richard Alexander, a well-known evolutionary 
biologist, was invited to describe how biology and human behavior 
could inform economics. the plan was simple. Get a large group of 
smart people in a room, get them all to see that economics had clear 
problems, and convince them to work together to come up with a new 
theory. the plan was to use this conference to kick off the new Man-
hattan Project.
the conference itself was a success: this wide-ranging group of 
physicists, biologists, economists, and finance professionals found 
much to debate and discuss. But when the conference ended, the re-
searchers went their separate ways. As Smolin later explained, there 
was too much bullheadedness even among these economics outsid-
ers to produce fruitful collaboration. everyone agreed that economic 
theory faced major problems, but it was impossible to build consensus 
on what the problems were, never mind how to fix them. Many of the