Department of Mathematics

Alumni Events

December 2008 - Alumni Reception

Mathematics and the Global Economy
Professor Luis Seco,
Department of Mathematics

In order to understand the role of mathematics in the global economy of today, it is useful to reflect on math and its history. In particular, I want to go back to the 1850’s, the decade when math started the process to shape itself as we know it today. The 50’s were an age of discovery. Joseph Fourier had discovered what will become the mp3 technology of our days. His approach was bold, and defied intuition to mathematicians of that age. In fact, Euler was a complete agnostic about his proposed discoveries. Many of the problems arose because the concept of the integral, which had been used successfully in engineering and physics since Newton, was realized to be based on very shaky ground. The attempts to put it on firm ground lead to a complete make over of mathematics; questions such as what a number is had to be addressed, for the first time ever. Mathematics had to stop what had been its role as a service provider to the other physical sciences, mostly Physics and Engineering, and devote all its energy to rebuild itself from the ground up. The result has been 100 years of intense abstract mathematical developments, during which new disciplines were born, such as Statistics and Probability, Set theory, Quantum Mechanics, Topology, and even traditional Differential Equations took on a complete new approach. And all of this in almost complete isolation, with occasional and exceptional love affairs with Physics. But over the last thirty years, all that body of knowledge generated since the 1850’s is exploding and finding partner disciplines to deploy its mathematical might.

The Nobel Prize awarded to John Pople and Walter Kohn in 1998 highlighted the importance of the advances in computational chemistry. John Nash won his Nobel Price in Economics for his work on game theory. One of these areas is finance. In 1973, Fisher Black, Myron Scholes and Robert Merton found a mathematical way to understand options markets. Their discovery was not immediately understood by the financial sector, which lacked the technical preparation at the time. But in the eighties, a new breed of young practitioners, many of them former unemployed particle physicists, found ways to used it in very profitable ways. The options and derivatives markets flourished, and eventually created the market crash of 1987.

The reaction of the business and government sectors what to increase regulation. The BIS treaty of 1991 called for risk management systems to be deployed at the banks by December 31, 1997. What was interesting in this regulation was its extraordinary level of mathematical sophistication.
But this did not stop the market from crashing once again in 1998, during the tumultuous summer were we were introduced to the Russian default and Monica Lewinsky, both events leading to the disappearance of available credit for a few months.
More regulation followed and, despite the tech bubble of the new millennium, markets plowed along and economic bonanza seemed to be firmly engrained in the financial system.

What had actually happened was that market sophistication, the creation of credit derivatives, provided many financial firms with what seemed a new way to conduct business, with little or no apparent risk. The financial services sector, which historically accounted for about 3% of the US economy, rose to over 20%. Risk was being transferred front, right and center, in such as way that it seemed to … disappear. But it didn’t, risk was merely hiding.
Not many were surprised when the subprime bubble burst in 2007. In fact, what became clear last year is that mathematical sophistication had simply allowed risk to be hidden better and better. But almost everyone was surprised to see in 2008 the crisis to extend beyond the subprime, to the prime and super-prime areas, in such a way that the interconnectivity that allowed the financial systems to flourish during the last twenty years was now contributing to a domino-style collapse of the financial system worldwide.

Mathematics shares with the rest of the business part of the praise for the efficiency of the market that allowed credit to reach millions of consumers, and part of the blame for the demise of the credit market in 2008. What we are likely to see in a future of renewed regulation and reconstruction of financial markets is a continued relationship between mathematics and finance, from this day forward, for better or for worse, for richer, for poorer, in sickness and in health, to love and to cherish; from this day forward until death do us part.

A Three Snake Day

On our annual Bruce Trail walk on the last weekend in September we saw three (actually four) snakes, some frogs, and a salamander. This indicates good weather and great spirits. These walks are ideal to meet and get to know fellow mathematicians. You can talk while you walk. You may talk a lot or avoid talk altogether because for the most part we walk in single file.

Our first walking on the Bruce Peninsula took place in 1972. Now some families are represented by three generations of enthusiastic walkers. Visitors to the department often join the hard-core hikers and new faculty regularly take this opportunity to meet colleagues casually. Our route which is close to Tobermory is on the whole rugged, but it has also less demanding stretches, and the last kilometre is now wheel chair accessible. So it is easy on the feet and after walking for six or seven hours this is a relief. Walkers are a welcoming crowd.Ragnar Buchweitz does the organization.Here are some photos.

E. W. E.