It’s all about the coercion

Obamacare impinges on individual liberty and does harm to our system’s checks and balances.  SCOTUS has ordered an extraordinarily long time for oral arguments this summer because the issues really are BIG ONES.

In an odd way this administration may be accelerating the end of the progressive vision.  It’s sped up our fiscal bankruptcy and is forcing these Constitutional issues towards what may be, for them, an unsatisfactory outcome.  I guess we’ll see.  It might come down to what Justice Kennedy has for breakfast that morning. 

Here are good/brief summaries of the twin coercions involved: the individual mandate and the federal “coercion doctrine”.

Anti-Obamacare Brief, explained by Mario Loyola at NR:

The main insurance reforms in Obamacare — guarantee issue, age-based premium compression, and a host of other “improvements” — were attempted in a handful of states in the 1990s. The results were an unmitigated disaster; in most cases the individual insurance market collapsed in just a few years, and within ten years most of the states had repealed their ill-conceived “reforms.”

The reason for the disaster was the “adverse-selection death spiral.”  Once you require insurance companies to provide insurance to all comers, healthy people start waiting until they’re sick to get health insurance.  As healthy people leave the risk pool (“adverse selection”), premiums rise to keep up with the rising per-person cost of insuring people; rising premiums in turn drive more healthy people out of the market, and vice versa (the “death spiral”)… Obamacare has an individual mandate, which is meant to prevent the adverse-selection spiral…  In other words, Obamacare — without the individual mandate — is a more complete recipe for disaster than any of the state-based insurance reforms.

Its main “reforms” depend vitally on an unconstitutional insurance mandate. If the mandate disappears, but the rest of the law is sustained, healthy Americans above 400 percent of the federal poverty level ($43,561 income for a single individual) will be driven off health insurance altogether, and will wait until they’re sick to sign up. Insurance premiums will rise dramatically, and for those making between $15,028 and $43,561 for an individual the cost of federal subsidies will skyrocket. In short, without the mandate Obamacare will result in some combination of (a) devastation for health insurers and (b) skyrocketing federal deficits.

George Will in the WaPo, A Supreme Obamacare Test:

In theory, state participation in Medicaid is voluntary; practically, no state can leave Medicaid because its residents’ federal taxes would continue to help fund the program in all other states. Moreover, opting out of Obamacare’s expanded Medicaid would leave millions of poor people without affordable care. So Obamacare leaves states this agonizing choice: Allow expanded Medicaid to devastate your budgets, or abandon the poor…

The Supreme Court has held that the states therefore retain “a residuary and inviolable sovereignty” incompatible with federal “commandeering” of states’ legislatures and executives. Under Obamacare’s Medicaid expansion, states are dragooned for the furtherance of federal objectives…

The court thereby said the federal government cannot behave like Don Corleone, making offers states cannot refuse. At some point, government crosses the threshold of unconstitutional compulsion.

The crucial consideration is the degree of threatened impoverishment. Because of Obamacare, the nation needs clarity from the court. If it now thinks Congress has unfettered power to place conditions on states receiving money from it, the court should explicitly disavow its coercion doctrine. But if the coercion doctrine is to survive, Obamacare should not.

The Obamacare issues of Medicaid coercion and the individual mandate are twins. They confront the court with the same challenge, that of enunciating judicially enforceable limiting principles. If there is no outer limit on Congress’s power to regulate behavior in the name of regulating interstate commerce, then the Framers’ design of a limited federal government is nullified. And if there is no outer limit on the capacity of this government to coerce the states, then federalism, which is integral to the Framers’ design, becomes evanescent.

APOF XLIII

This week’s collection of pictures includes some bonus material, the last of which doesn’t qualify as astronomy unless you believe we stole it from the Klingons…

• 12 must-see sky watching events in 2012
• Cool animation of a massive CME erupted on 1/19 and hit Earth 1/21.
• Top Scientific Discoveries of 2011
• First demonstration of time cloaking

Invisibility cloaks are the result of physicists’ newfound ability to distort electromagnetic fields in extreme ways. The idea is steer light around a volume of space so that anything inside this region is essentially invisible.

The effect has generated huge interest. The first invisibility cloaks worked only at microwave frequencies but in only a few years, physicists have found ways to create cloaks that work for visible light, for sound and for ocean waves. They’ve even designed illusion cloaks that can make one object look like another.

Today, Moti Fridman and buddies, at Cornell University in Ithaca, go a step further. These guys have designed and built a cloak that hides events in time.

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How do you like your govt: limited or quick?

Michael Barone in the Washington Examiner Obama’s 1-man rule thumbs nose at Founders

“When Congress refuses to act, he will.”

This looks uncomfortably close to the view taken by King Louis XIV. “L’etat, c’est moi,” he is supposed to have said, and you don’t need John Kerry’s or Mitt Romney’s command of French to know that that means one man rule.

The Framers of the Constitution saw it a different way. When the Senate refuses to confirm a presidential appointee, that person does not take office. When the Senate is not in recess, the president cannot make a recess appointment.

The Framers thought it more important to limit power than for government to act quickly. Obama disagrees.

Republican presidential candidates have been praising the Founding Fathers. Obama has been defying them. Interesting contrast.

William McGurn in the WSJ Obama Brings Back the Constitution

(L)et us now, in full public view, credit his greatest public service as president: He is sending Americans back to the Constitution.

Yes, in the Bush years the air was also thick with accusations that the Constitution was being “shredded.” We now know that the professed concern for the Constitution was fake. We know it was fake because the same Bush claims of executive authority in war that provoked such apoplexy in our pundits, professors and politicos have for the most part been embraced by Mr. Obama—all to the distinct sound of silence.

Today we have a wholly different order of constitutional complaint. Where the accusations against Mr. Bush were led by prestigious law faculties and law firms, those against Mr. Obama reflect a more popular hue. Where the indictments of Mr. Bush were largely limited to war policy, those against Mr. Obama’s extend broadly to all areas of policy: foreign, economic and social. And where critics of Mr. Bush were obsessed with outcome, the discontent with Mr. Obama has been magnified by the uneasy sense that he is changing the fundamental rules of the game.

Donde esta mi optimismo politico?

I don’t understand the GOP’s, and sometimes my own, ennui about 2012.  Pick your metric – job approval, right track, personal finances – and BHOII isn’t just in bad shape but the worst ever at this point in a re-election cycle.  We ought to be overflowing with confidence and excitement.  The country is ready to fire the bad hire they made almost four years ago.  And yet…

Maybe we do want not just a win but a repudiation/apology, and Mitt is not going to get us that.

Here’s Yuval Levin adding fuel to the fire of my puzzled optimism in Obama’s Peculiar Re-Election Strategy

Based on what the president and his advisers have said and done in recent weeks, that strategy appears to consist of creating populist confrontations with Congress and then complaining that Washington is broken because Republicans won’t let the president have his way. That’s a strategy that tells the public that the current situation in Washington is untenable and change is needed. Is that not an odd way for a Democratic incumbent president (whose party also controls the Senate) to run against a Republican outsider? It first of all exacerbates the public’s mistrust of government, which tends to reinforce Republican policy proposals (since those generally aim to take power away from government) but to undermine Democratic ones (which generally aim to give more power to government). It also implies that President Obama is having trouble doing his job, which can’t be a great re-election theme. It says that the problem we have is the result of a conflict between the president and Congress in a year when the Republican Party, but not the Democratic Party, will be led by someone who is neither the president nor in Congress and so is presumably not part of that problem. And it argues (understandably) that things could only get better if the White House and Congress were both held by Democrats—but the last time that happened was when we ended up with those unpopular achievements of Obama’s first two years. Is he proposing to do more of that?

Indeed, the question of just what he is proposing to do raises another peculiar problem with this emerging strategy. The Obama team’s approach might make sense if the substance of their policy proposals were enormously popular, so that telling the public that these could be enacted if only Obama is given a few more years to push them might help his case. But what are those proposals? A payroll-tax holiday? Higher taxes on the wealthy? Is there anything else? Or to put it another way, why does the president want to be re-elected? To stop Mitt Romney? To implement Obamacare? What does he want to do with a second term? More of the same?

You have to assume that the Obama team understands how immensely unappealing the promise of four more years of the politics of the past three years would be to the public. Maybe what they have put in place so far is a predicate for some policy proposals—perhaps a comprehensive tax reform, or some entitlement reforms that might scramble the ideological mix a bit. But that would seem to be in tension with the goal of creating conflicts with congress over economically populist ideas, and in tension with the president’s recent actions, appointments, proposals, and tone. It certainly doesn’t seem like he’s still planning fundamentally to pose as a centrist who wants to work with Republicans.

Maybe there’s another attempted image transformation in the works, though the past ones clearly haven’t worked very well. Maybe there’s another shoe to drop in the president’s confrontational populist agenda, which will turn it into a workable strategy. Or maybe the president and his team are just not very good at this. The evidence of the past three years would certainly seem to support the latter view. While they were able to masterfully carry off a campaign of airy fantasy in 2008, Obama and his advisers have since failed fairly spectacularly to employ the power of the president effectively. They now seem to be engaged in trying to generate another dramatic narrative out of thin air, but a re-election campaign can’t be such a creature of invention: It must necessarily be grounded in the reality of the president’s record and buttressed by the able employment of the president’s power. If the Obama team thinks it can turn the election into a referendum on the Republican candidate then they’ve got another thing coming, and if they think Obama can mount an ugly campaign of character assassination against his opponent and come away unscathed himself then they haven’t stopped to consider that his personal likability is the only thing keeping him from a total meltdown. So what’s the plan?

None of this is to say that Mitt Romney or whoever is the Republican nominee will have an easy time, of course. He will have his own significant weaknesses and vulnerabilities, no doubt, and he will need to offer the public an appealing governing vision and plausible solutions to the daunting problems we confront. Incumbents have some natural advantages, too, which even a hapless political strategy cannot completely eradicate. But this will be a very challenging year in which to run for re-election, and success will require a smart and effective strategy and a powerful case to the public. It so far frankly seems like the Obama campaign is lacking in both of those components, and is flailing about in the hope that American voters have finally at long last decided that they really hate rich people—a false misguided hope that has cost the Democrats many elections.

Donde esta Código Rosa? Los ACLU?

Some wag once said that the lowest form of punditry is to say, “imagine if a republican president were to do that.”

Here’s VDH in Obama’s Postmodern Vision:

There has been for months a popular parlor game of tallying instances in which President Obama seems to have either ignored or simply bypassed federal law. But what started out as a way of exposing occasional hypocrisy is now getting a little scary…

Every administration, of course, has constitutional disputes with Congress, the courts, and the public over the exact limits of its power. But in the case of the Obama administration there is a new sort of lawlessness unseen in recent governments. Is that predictable or surprising, given Obama’s own constant references to himself as a former constitutional scholar and community organizer?

Both as a state legislator and as a U.S. senator, Obama blasted as unconstitutional or abuses of presidential power almost all of the Bush-Cheney anti-terrorism protocols — Guantanamo, renditions, military tribunals, preventive detention, the Patriot Act — which as president he later embraced or expanded. Apparently, Obama’s own status as an out-of-power senator or an in-power president, and the degree to which such issues were or were not politically useful to his larger agenda, alone determined whether something like renditions or military tribunals was lawful.

Other than the normal explanations of abject hypocrisy and political expediency, why has the Obama administration shown such a disdain for the integrity of the law? In a word, Obama is a postmodernist. That is a trendy word for someone who leaves academia believing that there are not really absolute facts, but merely competing ideas and discourses. In this view, particular ideologies unfortunately gain credibility as establishment icons only from the relative advantage that arises from race, class, and gender biases.

In postmodern jurisprudence, “critical legal theory” postulates that law and politics are inseparable. Those with power call their self-serving rules “the law.” But “laws” are not sacrosanct. Instead, they are mere embedded reflections of wealthy, white, and male privilege — dressed up in some bogus timeless concept of “justice.”

A few critical and progressive minds among the legal technocracy have the ability to spot these fictions. And thus a Barack Obama or an Eric Holder has a duty on our behalf to use his training to make the necessary corrections, even if the rest of us don’t quite fathom what is going on.

Maybe Twinkies can survive a nuclear holocaust, but not this.

Da Boom: The Griffins survive in a Twinkie factory bomb shelter

Twinkies are the latest casualty… of unsustainable pension and benefit obligations!  It’d be nice to get rid of Wonder Bread, and I never much cared for Twinkies.  But Ding Dongs?  Say it isn’t so.  I agree with Dan Foster:

(T)he venerable Ding Dong. Neither the ubiquity of the Twinkie, nor the esoterism of the Sno Ball. Just sturdy, reliable, no-nonsense goodness. The Dwight Eisenhower of snack cakes.

This story is a near-perfect microcosm of where the nation is:  whether it’s public or private unions, teachers or Twinkies, the promises made can’t be kept.  Either elected officials (in the former case) or management (in the latter) found it easier to promise the workers across the table fatter pensions and benefits and leave the costs to someone else down the road.  We’ve arrived down the road, and we’re effed.

Confiscate the entire wealth of the nation (former case) or the company (latter), and there’s still not enough money to honor the promises. “The rich” aren’t numerous enough to foot the bill.  This will be a fight between the young working middle class and the retired and slightly-better-off middle class.  From Holman Jenkins in The Truth about Bain and Jobs:

Look no further than Ripplewood Holdings’ decision to put the maker of Twinkies into bankruptcy this week. It’s the kind of decision that, were Ripplewood’s principals ever to run for office, would get them savaged in an ad.

But guess what? Ripplewood also bought the company, Hostess Brands, out of bankruptcy three years ago, when it was called Interstate Bakeries. Ripplewood is just the latest manager to wrestle unsuccessfully with the company’s fundamental problem, a unionized workforce in an industry where competitors aren’t unionized.

Next time you’re choosing a fattening indulgence in the checkout line, ask yourself if you’re willing to pay extra so Twinkies and Wonder Bread (made by the same company) can arrive at the store on different trucks? So the driver can be excused from helping to unload? So the company can pay workers-comp costs way out of line the industry’s? So a company with just 19,000 employees can administer 40 different pension plans?

To be fair, customers have been switching to healthier snack options, so lower sales in the industry is putting increased pressure on all the competitors.  Hostess Brands is just more bloated and less flexible, and so is getting beat up by a girl.  (Little Debbie.  Mmmmm – Snack Rolls….)

I would think it makes more sense for someone – maybe a competitor like Little Debbie – to simply buy the Hostess assets out of bankruptcy.  Take the brand names and recipes and make them in your own factories and deliver them on your own trucks.  That’s how it should work:  the efficient producers hire more people, we all pay less for the product and see our 401(k)s grow; the inefficient producers adapt or go extinct.  That’s capitalism’s creative destruction at work.  Jenkins again:

Between 1977 and 2005, years roughly overlapping Mr. Romney’s business career, some 15% of all jobs were destroyed every year, even as total jobs grew by an average of 2% a year. Job creation and destruction are both relentless, the authors showed in paper after paper. The small difference between the two is what we call prosperity.

I loved the author’s correct use of the tree from The Garden of Eden:

To fault Mr. Romney for being involved with businesses that both grew and shrank, that created jobs and destroyed them, may be to fault him for having eaten from the tree of knowledge in a way that, say, President Obama has not. But how will his story fare in November against Mr. Obama’s simpler story, in which ravenous capitalists destroy jobs and government creates them with things like the Detroit/UAW bailout, solar subsidies and health-care mandates?

Heh heh.  The article closes with what might be the best argument for Romney presidency.  I’m going to have to make up my mind pretty soon, FL primary coming up.

What does this have to do with the presidency? Perhaps not much, but one thing he didn’t learn at Bain Capital was to twiddle his thumbs because taking action might make somebody mad at him. That’s not the worst qualification to bring to the Oval Office right now.

Interesting analogy: China as our Antebellum South

On several occasions I’ve quoted other authors when they’ve penned great one-liners to describe the situation in China: a crime wave with a flag; a billion souls in a sex imbalanced society; a crime syndicate in a stage of “bumptious nationalism” (like Britain circa 1800 or the US circa 1900) with a “naïve, passionate, and uncritical” patriotism; the US plus 1 billion peasants.

When I do I also typically add that you can never have too many robot space planes.

The most recent installment:   inspired by this piece in The New York Times about Chinese president Hu Jintao’s concern over “the West’s assault on (his) country’s culture and ideology,” Walter Russell Mead offers the following analogy:

It’s a window into the psychology of China’s leadership at a critical time.  The sense of threat, encirclement and danger is real — along with the sense that America is trying to divide, crush and destroy China.

He is not, of course, totally wrong.  Americans generally do believe that a house divided cannot stand, and that the world cannot long endure half slave and half free.  Communism and dictatorship will, we tend to believe, someday fall in China just as they have done in so many other places.

More, our strategy for dealing with communism in China is more or less the same as our strategy for dealing with it in the Soviet Union.  It’s what Lincoln and the Republicans wanted to do to slavery in 1860: keep it from expanding, and wait while the forces of history destroy it from within.

Lincoln then and Americans today don’t think of this as an aggressive strategy. Changing the political structure of China is not on anybody’s to-do list in Washington today.  The CIA isn’t hatching plots to overthrow the Chinese leadership.  Lincoln swore up and down that he wouldn’t abolish slavery where it stood, and would have accepted a constitutional amendment making that position clear.

But Jefferson Davis and his fellow southerners weren’t fooled.  They knew that Lincoln’s program to contain slavery was a plan to destroy slavery and, worse, they were sure it would work.  Cotton exhausted the soil; sooner or later, if slavery couldn’t expand into new territory, plantations wouldn’t pay and when that happened the whole system would fail. Moreover, the North was growing faster than the South; increasingly the South would be outvoted and turned defensively in on itself.

Hu and some of his fellows seem to be thinking like Jefferson Davis.  They believe that America’s project (it isn’t as definite as a plan) to undermine communism in China will work in due course.  They fear the historical forces Francis Fukuyama identified in The End of History, and they fear that those forces march to the tune of the Star Spangled Banner.

Further, they connect (psychologically if not explicitly) America’s geopolitical strategy of balancing power in Asia with the containment policy we practiced against the Soviets.  They see us in India, Japan, Australia, Vietnam and many other places in the region and they see the same kind of geopolitical and geoeconomic web-weaving that hemmed in and ultimately brought down the Soviets.

Americans, contemplating our policies in Asia and our ideological approach to Chinese communism, see us as promoting a stable status quo that ought to appeal to the Chinese.  President Hu and many Chinese leaders see things very differently: the status quo is a dagger aimed at China’s heart. Our very moderation is a sophisticated form of aggression.

This perception gap is something both sides will have to live with, and the ensuing climate of suspicion and hostility is something we will both have to manage. Jefferson Davis, Kaiser Bill and Adolf all decided to fight what they saw as encirclement and containment by hostile powers.  It didn’t work out well for them, but a lot of others were badly hurt in the process as well.

US-China relations are a complicated mix of hostility and mutual dependence. Understanding that mix and managing the relationship in a sustainable way must be a top priority for leaders in both countries.

Eulogy for God’s favorite (?) atheist

There have been many admiring and moving RIPs for Christopher Hitchens from his “opponents” on the right.  My favorite, found at Creative Minority Report, has been Fr. Robert Barron on Why I loved to listen to Christopher Hitchens:

Over the years I’ve accused some of my atheist interlocutors (on Youtube) – in a playful spirit – of being “secret Herods.”  Herod arrested John the Baptist, was opposed to him, but loved to listen to him preach.  So I tease (them) that they’re secret Herods – they come on my sites, leave all sorts of acerbic remarks and so on – “you claim to be opposed to religion but you secretly like to listen.”  I will confess there was a reverse Herod syndrome for me regarding Christopher Hitchens…  I loved to listen to him… part of that was what the Romans called “gaudium de stylo” – the joy that we take simply in style.  I don’t know if there was a better writer on the scene today.

Later in the piece Fr. Barron makes a case for Hitchens – a case with which he would most certainly have found reasons to disagree, as several people, believer and atheist, do in the comments section.

It fleshes out a point I make to non-believing friends in (obviously) simpler terms when they raise “the problem of evil”:  the world is clearly a mess – fallen, if you will – and the fact that there is any love and kindness in it at all is evidence of God.  Here’s an excerpt:

The main reason I liked Christopher Hitchens was because of his deep religiosity.  I realize that requires a little bit of explanation. I’ll start with what I think was Hitchen’s great mistake when it comes to God.  Like Dawkins and Sam Harris and many others, Hitchens consistently misconstrued what serious religious people mean when they say God.

Time and again, Hitchens and now his millions of disciples – I hear from them, almost every day – refer to God as a “Sky Fairy” or “your invisible friend” or The Flying Spaghetti Monster – meaning some crazy mythological fantasy for which there is absolutely no evidence.  Hitchens would also excoriate religious people for what they call the “God of the gaps.”  You know – there’s a gap in our present scientific explanation so let’s put God there, and as science advances, God retreats to ever smaller gaps in the explanatory systems.

Here’s the thing:  all of that is wide of the mark when we say God.  God is not a being in the world.  The Creator of the entire universe is not an ingredient in the universe, is not an item among many in the universe.  God is not some reality for which there may or may not be evidence.  “Is there a moon, moons around Jupiter?  Let’s check and see.”  There are or there aren’t.  God isn’t like that, some “being” in the world.

Thomas Aquinas made the decisive distinction when he said God is not “en summum” – highest being; he’s “ipsum essay” – the sheer act of to be itself.  God is the reason why there’s something rather than nothing.  God is the reason why there is the nexus of condition causality at all.

God is not a true thing, but the truth itself.  God is not a good thing among many, God is goodness itself.  God is not one just state of affairs, God is justice itself.  Once we get this clear we can see what I mean when I say Christopher Hitchens was profoundly religious.  Something you see, book after book, essay after essay, speech after speech:  he was passionate for justice… he was a profoundly moral man, I would say, even moralizing, an intense sense of what’s right and just.  That is a sign that someone has been grasped by the unconditioned just.

If there’s no God, we’re just dumbly here by vague chance, the universe just spins along in utter indifference to human cruelty, human nobility.  One day this whole world will be incinerated.  All of us just live a short time and then fade away.  If that’s the case, truly – why would you care about justice?  Why would you care, ultimately?  Wouldn’t Dostoevsky be right in saying if there is not God then anything is permitted?

Those who burn with a passion for justice, I would argue, have a keen sense of an absolute unconditioned criterion of justice which I would call God…  I saw that on display in practically everything Christopher Hitchens wrote.  He was battling Sky Fairies and Flying Spaghetti Monsters – fine, I’d battle those too.  He’d claim there’s no evidence for some mythological supreme being.  I agree with him.  But what I caught behind his rhetoric, always, was a passion for God – not to put too find a point on it.

The lies that politicians tell themselves

A former finance minister in Europe was recently quoted as saying, on the topic of the present mess in the euro zone, that an “error became evident during the crisis.  (This) political delusion should have already been acknowledged and explained a year and a half ago.”

That could be said of so very, very, many political programs with noble ends but delusional designs.  As the famous quip about conservatism goes:  Conservatism has a certain meanness of spirit – along with a superiority of fact.

Or if you prefer, and I’m paraphrasing from memory so may butcher it a bit, about incentives:  There is no way to get a man to believe one thing when his salary or job requires him to believe another.  Too many political careers depend on sustaining the unsustainable.  So rather than face the delusions and solve the problem, they’ll kick the can down the road until there’s no road left.

No matter how much we raise taxes on the rich, there’s a loooooong list of programs and special interests who’ll be getting haircuts.  Will it be just a little off the top and sides, or a buzz cut that leaves a few nicks?  If it were up to me I’d throw them a hockey-style blanket party in which you don’t hit them with soap-in-sox but roll them up and shave their heads.   Maybe just one soap-in-sox.  Or two.  Or…

Whoever tackles it has a shot at a historic presidency.   But that history will be made by reforming/abandoning/betraying the New Deal and Great Society.  The blue model is played out so all that’s left is how much you can limit the damage by gouging the rich.  But there’s gonna be damage.  There simply isn’t enough money – anywhere! – to cover all the unfunded liabilities of the social safety net and public sector union pensions.

Too many delusions in the designs.

Book review: Models Behaving Badly

Bringing ethics into his analysis, Mr. Derman has no patience for coddling the folly of individuals and institutions who over-rely on faulty models and then seek to escape the consequences. He laments the aftermath of the 2008 financial meltdown, when banks rebounded “to record profits and bonuses” thanks to taxpayer bailouts. If you want to benefit from the seven fat years, he writes, “you must suffer the seven lean years too, even the catastrophically lean ones. We need free markets, but we need them to be principled.”

Excerpts from the review of Emanuel Derman’s book in the December 14 WSJ.  His comment about Maxwell’s equations reminded me of a great (nerd alert) t-shirt from my engineering days…

Mr. Derman’s particular thesis can be stated simply: Although financial models employ the mathematics and style of physics, they are fundamentally different from the models that science produces. Physical models can provide an accurate description of reality. Financial models, despite their mathematical sophistication, can at best provide a vast oversimplification of reality. In the universe of finance, the behavior of individuals determines value—and, as he says, “people change their minds.”

In short, beware of physics envy. When we make models involving human beings, Mr. Derman notes, “we are trying to force the ugly stepsister’s foot into Cinderella’s pretty glass slipper. It doesn’t fit without cutting off some of the essential parts.” As the collapse of the subprime collateralized debt market in 2008 made clear, it is a terrible mistake to put too much faith in models purporting to value financial instruments. “In crises,” Mr. Derman writes, “the behavior of people changes and normal models fail. While quantum electrodynamics is a genuine theory of all reality, financial models are only mediocre metaphors for a part of it.” …

He sums up his key points about how to keep models from going bad by quoting excerpts from his “Financial Modeler’s Manifesto” (written with Paul Wilmott), a paper he published a couple of years ago. Among its admonitions: “I will always look over my shoulder and never forget that the model is not the world”; “I will not be overly impressed with mathematics”; “I will never sacrifice reality for elegance”; “I will not give the people who use my models false comfort about their accuracy”; “I understand that my work may have enormous effects on society and the economy, many beyond my apprehension.”

Sampling from models that behave well, Mr. Derman gives an eloquent description of James Clerk Maxwell’s electromagnetic theory in a chapter titled “The Sublime.” He writes: “The electromagnetic field is not like Maxwell’s equations; it is Maxwell’s equations.” In another chapter, titled “The Absolute,” he outlines Spinoza’s “Theory of Emotions”—a description of the nature of emotions that did for man’s inner life, Mr. Derman says, “what Euclid did for geometry.” But then he turns to financial models—behaving badly.

The basic problem, according to Mr. Derman, is that “in physics you’re playing against God, and He doesn’t change His laws very often. In finance, you’re playing against God’s creatures.” And God’s creatures use “their ephemeral opinions” to value assets. Moreover, most financial models “fail to reflect the complex reality of the world around them.” …

Bringing ethics into his analysis, Mr. Derman has no patience for coddling the folly of individuals and institutions who over-rely on faulty models and then seek to escape the consequences. He laments the aftermath of the 2008 financial meltdown, when banks rebounded “to record profits and bonuses” thanks to taxpayer bailouts. If you want to benefit from the seven fat years, he writes, “you must suffer the seven lean years too, even the catastrophically lean ones. We need free markets, but we need them to be principled.”