<http://www.thestar.com/business/article/604033>
The article omits reference, however, to the fact that Li's "Gaussian copula function" is underpinned by the absurd "efficient market hypothesis", i.e. quoting from the original Wired article:
"Li wrote a model that used price rather than real-world default data as a shortcut (making an implicit assumption that financial markets in general, and CDS markets in particular, can price default risk correctly)."
Instead of pointing to this as the formula's deficiency, the article locates the problem in mis-specification of the mathematics:
"What Li's theorem could not do was predict what might happen in extreme economic environments, what experts call 'tail dependency.'"
In fact, liquidity crises are not random events. They are, as Keynes's explanation of them assumes, a regular feature of the irrational psychology that dominates financial markets, an irrational psychology that can't be represented mathematically.
Keynes traced the mistaken identification of science with mathematical representation to the same irrational psychology he took to be dominant in these markets.
This explanation is confirmed by the resort by many "experts" to critiques pointing to mistaken specification of the mathematics, e.g. to mistaken specification of the "randomness" involved, or to the use of "linear" as opposed to "non-linear" algebra.
Though the role Keynes assigns to "irrationality" is acknowledged by Shiller and Akerlove in Animal Spirits, it still goes largely unrecognized by economists, including by those economists who style themselves Post Keynesian.
An example is Amartya Sen's essay in the current NYRB where Keynes's treatment of economic, including financial market, instability is unfavorably compared to Pigou's on the ground that:
"Pigou was much more concerned than Keynes with economic psychology and the ways it could influence business cycles and sharpen and harden an economic recession that could take us toward a depression (as indeed we are seeing now)." <http://www.nybooks.com/articles/22490>
> Keynes can be our savior only to a very partial extent, and there is
> a need to look beyond him in understanding the present crisis. One
> economist whose current relevance has been far less recognized is
> Keynes's rival Arthur Cecil Pigou, who, like Keynes, was also in
> Cambridge, indeed also in Kings College, in Keynes's time. Pigou was
> much more concerned than Keynes with economic psychology and the
> ways it could influence business cycles and sharpen and harden an
> economic recession that could take us toward a depression (as indeed
> we are seeing now). Pigou attributed economic fluctuations partly to
> "psychological causes" consisting of
>
> variations in the tone of mind of persons whose action controls
> industry, emerging in errors of undue optimism or undue pessimism in
> their business forecasts.[5]
>
> It is hard to ignore the fact that today, in addition to the
> Keynesian effects of mutually reinforced decline, we are strongly in
> the presence of "errors of...undue pessimism." Pigou focused
> particularly on the need to unfreeze the credit market when the
> economy is in the grip of excessive pessimism:
>
> Hence, other things being equal, the actual occurrence of
> business failures will be more or less widespread, according [to
> whether] bankers' loans, in the face of crisis of demands, are less
> or more readily obtainable.[6]
Sen also repeats the mistaken interpretation of Keynes as "the guru of a new capitalism".
> The revival of Keynes has much to contribute both to economic
> analysis and to policy, but the net has to be cast much wider. Even
> though Keynes is often seen as a kind of a "rebel" figure in
> contemporary economics, the fact is that he came close to being the
> guru of a new capitalism, who focused on trying to stabilize the
> fluctuations of the market economy (and then again with relatively
> little attention to the psychological causes of business
> fluctuations). Even though Smith and Pigou have the reputation of
> being rather conservative economists, many of the deep insights
> about the importance of nonmarket institutions and nonprofit values
> came from them, rather than from Keynes and his followers.
Ironically, it's Keynes who, like Marx, has appropriated Smith's idea of "the invisible hand" in the form given to it by Kant and Hegel. In that form, it's the positive role assigned to irrational "passions" in human historical development.
Keynes, like Marx, makes these irrational "passions" a means, via the impulse they give to the development of productive forces, to the solution of the "economic problem" and, this solution having been achieved, to the eventual transcendence of capitalism, defined, as in Marx (M-C-M'), by the irrational "passions" dominant in it, i.e. defined by "the dependence upon an intense appeal to the money-making and money-loving instincts of individuals as the main motive force of the economic machine."
Keynes's "ideal social republic of the future", also like Marx's, draws directly and indirectly on Greek ideas, specifically on Aristotle's, i.e. on ideas by which Sen himself claims to have been importantly influenced.
Ted