Varoufakis on when economics clashes with real world politics

On the relevance of game theory in real life negotiations:

Roy Bailey, University of Essex: Was the surprise referendum of July 5 conceived as a threat point for the ongoing bargaining between Greece and its creditors, and has the last year caused you to adjust how you think about game theory?

Varoufakis: I shall have to disappoint you Roy [Editor’s note: Roy Bailey taught Varoufakis at Essex and advised on his PhD]. As I wrote in a New York Times op-ed, game theory was never relevant. It applies to interactions where motives are exogenous and the point is to work out the optimal bluffing strategies and credible threats, given available information. Our task was different: It was to persuade the “other” side to change their motivation vis-à-vis Greece.

I represented a small, suffering nation in its sixth straight year of deep recession. Bluffing with our people’s fate would be irresponsible. So I did not. Instead, we outlined that which we thought was a reasonable position, consistent with our creditors’ own interests. And then we stood our ground. When the troika pushed us into a corner, presenting me with an ultimatum on June 25 just before closing Greece’s banking system down, we looked at it carefully and concluded that we had neither a mandate to accept it (given that it was economically non-viable) nor to decline it (and clash with official Europe). Instead we decided to do something terribly radical: to put it to the Greek people to decide.

Lastly, on a theoretical point, the “threat point” in your question refers to John Nash’s bargaining solution, which is based on the axiom of non-conflict between the parties. Tragically, we did not have the luxury to make that assumption.

On the relevance of economic models in real world:

Kamal Munir, University of Cambridge: You often implied that what went on in your meetings with the troika was economics only on the surface. Deep down, it was a political game being played. Don’t you think we are doing a disservice to our students by teaching them a brand of economics that is so clearly detached from this reality?

Varoufakis: If only some economics were to surface in our meetings with the troika, I would be happy! None did.

Even when economic variables were discussed, there was never any economic analysis. The discussions were exhausted at the level of rules and agreed targets. I found myself talking at cross-purposes with my interlocutors. They would say things like: “The rules on the primary surplus specify that yours should be at least 3.5 percent of GDP in the medium term.” I would try to have an economic discussion suggesting that this rule ought to be amended because, for example, the 3.5 percent primary target for 2018 would depress growth today, boost the debt-to-GDP ratio immediately and make it impossible to achieve the said target by 2018.

Such basic economic arguments were treated like insults. Once I was accused of “lecturing” them on macroeconomics. On your pedagogical question: While it is true that we teach students a brand of economics that is designed to be blind to really-existing capitalism, the fact remains that no type of sophisticated economic thinking, not even neoclassical economics, can reach the parts of the Eurogroup which make momentous decisions behind closed doors.

On viability of the euro monetary union

Cristina Flesher Fominaya, University of Aberdeen: The dealings between Greece and the EU seemed more like a contest between democracy and the banks than a negotiation between the EU and a member state. Given the outcome, are there any lessons that you would take from this for other European parties resisting the imperatives of austerity politics?

Varoufakis: Allow me to phrase this differently. It was a contest between the right of creditors to govern a debtor nation and the democratic right of the said nation’s citizens to be self-governed. You are quite right that there was never a negotiation between the EU and Greece as a member state of the EU. We were negotiating with the troika of lenders—the International Monetary Fund, the European Central Bank, a wholly weakened European Commission—in the context of an informal grouping, the Eurogroup, lacking specific rules, without minutes of the proceedings, and completely under the thumb of one finance minister and the troika of lenders.

Moreover, the troika was terribly fragmented, with many contradictory agendas in play, the result being that the “terms of surrender” they imposed upon us were, to say the least, curious: a deal imposed by creditors determined to attach conditions which guarantee that we, the debtor, cannot repay them. So, the main lesson to be learned from the last few months is that European politics is not even about austerity. Or that, as Nicholas Kaldor wrote in The New Statesman in 1971, any attempt to construct a monetary union before a political union ends up with a terrible monetary system that makes political union much, much harder. Austerity and a hideous democratic deficit are mere symptoms.

Vir: The Atlantic

One response

  1. “It is politics, stupid”. Everything is politics. Politika pa je igra interesov in če parafraziramo Bismarck-a realnih možnosti in ne želja.

    Varoufakis piše zanimive knjige in daje zanimive intervjuje, da pa spoznava bistvo politike šele potem, ko je nastopil (in odstopil) z mesta ministra pa je njegova osebna in grška katastrofa.

    Je pa vsa stvar koristna za svet ker vsem razgalja ozadja evropske in svetovne politike in razbija nevarne iluzije. Upam, da najprej pri univerzitetnih profesorjih ekonomije.

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