Föhrenbergkreis Finanzwirtschaft

Unkonventionelle Lösungen für eine zukunftsfähige Gesellschaft

Intellectual Thought vs. Pragmatic Common Sense

Posted by hkarner - 4. Februar 2016

Wednesday, February 3, 2016, Observing GreeceKastner

I take the liberty of publishing an email exchange with a Greek who teaches economics at a German university. I have only made a couple of minor changes in order to keep the exchange confidential.

Here is what the Greek wrote to me:

I have been following your blog ObservingGreece for quite some time now and would like to congratulate you on offering so many informative aspects and interpretations of the Greek economic crisis. You can perhaps imagine that for someone like me—a young professor of economics and economics education of Greek descent working at a German university—the ongoing Greek tragedy has been, and continues to be, both perplexing and frustrating at the same time. I am now experiencing the same mixture of feelings over the refugee crisis. Will Europe ever get its act together? I am reminding myself every day anew that hope never dies.

Sometimes I am wondering what academic economists can do—apart from entering politics. Perhaps the (second) best thing we can contribute is a level-headed analysis of what is going on. A former and I took the courage last year to attempt a game-theoretic analysis of the then ongoing confrontation between Greece and its creditors. We discern several indications that the Tsipras government followed a brinkmanship strategy and that the eurozone responded rationally by holding out; we thus reject the notion that the actions of the Greek government were just erratic and lacked coordination. We argue instead that the decisions of the Greek negotiators, including asking the voters to reject the earlier terms demanded by the creditors in a referendum, can be explained by the logic of strategic bargaining.

As a result of risk-taking on both sides, the deal struck between the two sides became more costly for everybody. The outcome of the confrontation between Greece and the eurozone thus resembles a classical prisoners’ dilemma: If both sides had acted in the common interest right from the start, a better deal for all would probably have been feasible. Instead both sides decided to trump the other and, by doing so, ended up with a much worse deal.

Perhaps you might find our work interesting? If so, you can find the working paper here (link eliminated). Your comments—including critical ones—would be highly welcome.

And here is my reply.

Thank you for your mail. In order for you to understand where I am coming from, let me quote from John Nash’s ending speech in the movie „A beautiful mind“:

„I have always believed in numbers. In the equations and logics that lead to reason. But after a lifetime of such pursuit, I ask what truly is logic? Who decides reason? My quest has taken me through the physical, the meta-physical, the delusional, and back and I have made the most important discovery of my career. The most important discovery of my life. It is only in the mysterious equation of love that any logical reasons can be found.“

Let me translate that into my own background. I, too, believe in logic, numbers and reason. But where John Nash’s quest in the academic world took him to the mysterious equation of love (in the movie, that is), my quest was in the business world and it took me to the solid basis of pragmatic thinking and common sense. To me, it is a waste of energy to analyze whether SYRIZA’s negotiations proved or disproved the game theory. The only things which matter to me are the questions: Did it work? Were the desired results achieved? Are we better off now? 

I agree with you that the results do correspond very much with the prisoner’s dilemma. But they only do so because one side in the negotiations decided to approach the whole subject as though it were an exercise in game theory. Game theory only works where people play games. 

Yanis Varoufakis may go down into history as one of the most interesting and flamboyant Finance Ministers of his time (and more). Perhaps like another John Maynard Keynes. But there is no question that in terms of results, he’s got to have been the worst Finance Minister the world has ever seen. He literally did enormous damage to his country. Why do I say that? Well, a pragmatic and common sense assessment: he could not convince any of his negotiating partners of his view of things and, in the end, he could not even convince his own Prime Minister, his boss, so to speak, of his views. There is no better measure of what failure is. Was/is Varoufakis right or wrong in his views? Well, I think he is right on more points than he is wrong. But the pragmatic and common sense reaction to that would be: „The graveyards of the world are full of people who were right!“

What could academic economists do for their country? Well, maybe this article which I wrote a long time ago will give you some ideas: An appeal to Greek brainpower.

I will look at your paper in the next days.

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