Intellectual Thought vs. Pragmatic Common Sense

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 PhD student 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.


ADDENDUM - Reply to my above reply on February 9

My coauthor and I try to be as impartial as possible when it comes to economic analysis. We do not try to ``prove game theory.´´ We just think that understanding how ``games´´ work in theory can indeed help to better understand what is going on in the real world. Having said this, we are aware that many people tend to reject explanations that do not conform to their own worldview.

We are certainly not in the business of erecting monuments to Tsipras or Varoufakis or anyone else. Our interpretation of politics is inspired by political economy and thus devoid of any romanticism as to what the incentives of politicians are. In the paper we do not applaud the Syriza government for having fought successfully for the sake of the Greeks but, on the contrary, suggest that electoral concerns may have trumped other considerations in the negotiations.

What motivated us to write the paper was the frequent misunderstandings and misinterpretations of how brinkmanship works in the media coverage of last year’s confrontation between Greece and its creditors. We show how such a strategy may have looked like in the Greek case. In doing so, we differentiate between threatening with Grexit and running the risk of a really painful Graccident. We also show that there are situations (``parameter value sets´´) where our game proceeds exactly like the confrontation between Greece and the creditors. The model thus helps us for example to understand what the purpose of the referendum may have been, and how it may have affected the outcome. Regarding this, we concede that this particular move was bold and tactically shrewd. But do we say the Greeks were smart and the creditors stupid? No. Do we say the Greeks were stupid and the creditors smart? No. What we are saying is that the outcome of the bargaining between the two sides does reflect the objectives and the strategies of more or less rational ``players.´´

In the second part of the paper we argue that the outcome was clearly not optimal for the actors. You said that this is no wonder, since only ``one side in the negotiations decided to approach the whole subject as though it were an exercise in game theory.´´ We beg to disagree, since we have at least developed a good argument to reject the interpretation that the Greeks were playing a game but the eurozone was not—or the other way round. You also speak of ``trust´´ and ``respect´´ the new Greek government did not enjoy in Berlin or Brussels, implying that reputation was irresponsibly scuppered by the Greeks. We point out again to our paper in which we say that making oneself deliberately unpredictable is absolutely necessary for someone who follows a brinkmanship strategy. The key question for us is whether Tsipras and his team actually managed to make the creditors believe the outcome of the process were unpredictable. A good brinkmanship player achieves this.

Did the Greeks pay a heavy price for their brinkmanship? Definitely. But did the Greek negotiators achieve something better with brinkmanship than they could have achieved without? Looking at the pros and cons of the third bailout package, our answer is most probably yes. Certainly the terms of the new deal were harsher than those offered by the creditors earlier. But that should surprise no-one, as the new deal is about an entirely new bailout with a much greater amount of money.