My Friend Yanis, The Greek Minister Of Finance

1/31/2015 Forbes by Steve Keen

I first met Yanis Varoufakis when he was a senior lecturer (the 3rd step in the 5-tiered Australian system, equivalent to a Professor in the USA) at Sydney University in the late 1980s, and I was a tutor (the 1st step) at the University of New South Wales. We’ve been friends ever since, and now he has become globally prominent as the Finance Minister of the most troubled and high profile economy on the planet, Greece.

Yanis the man as well as Yanis the economist will come under intense scrutiny and pressure from the media and other politicians now. Much of this will have the intention of either cutting him down, or turning the dilemmas he faces in his serious role into a source of media entertainment. I want to describe the man and economist I know with neither objective in mind.

I’ll start with the man—since without doubt the first attacks on him will focus on his character rather than his intellect.

Very few people make so strong an impression on you at first meeting that, decades later, you can still vividly remember the meeting itself. Yanis had such an impact. I went to attend a seminar at Sydney University where Yanis was the presenter. Most academic seminars are dull affairs; despite the fact that being an academic involves effectively being on stage, very few academics actually have stage presence. They will mumble, look around evasively, wander about talking as if in a madman’s monologue, or talk to their slides rather than the audience in what has rightly been called “Death By Powerpoint”.

Yanis, in contrast, filled the stage as soon as he began to speak, engaged the audience with direct eye contact, and spoke like an orator rather than a mere academic. His face also had a perennial wry smile to it, and his presentation included plenty as ironic humor as he pulled apart the conventional wisdom in his own field.

That humor—and the penchant for oratorical expression—proved to be intimate aspects of his persona, as well as a general warmth and generosity of spirit towards humanity. Backing that generosity up is substantial strength— physical as well as intellectual and emotional. He can be angered by misanthropic individuals, as I can, but in confrontation with them he will attack their intellectual pretensions rather than the individuals themselves.

This is reading like a hagiography, but only because Yanis is a genuinely good man. This was manifested in how he has reacted to the toughest experience in his life: having his daughter taken to Sydney against his will in 2005 by his Australian partner, after his return to Greece in 2000. His description of this event on his blog gives a good insight into his emotional integrity and personal honesty:

Life took a nasty turn, personally, well before the global economic crisis of 2008 and Greece’s implosion in 2009. The year was 2005. In that August my extremely young daughter, Xenia, was taken away by… Australia. For reasons that I now recognise as legitimate, her mother decided to take Xenia to Sydney and make a home for her there, permanently. Xenia’s loss left me in a state of shock (she has been living since then in Sydney, thus guaranteeing the longevity of my relationship with Sydney). (“From personal calamity to restored hope”)

Now for his economics. At that first meeting I also I perceived a kindred intellectual spirit in Yanis because he, like me, was a critic of the conventional beliefs in economics who was well trained in mathematics (Yanis’s formal qualifications in mathematics are an MSc in Mathematical Statistics from Birmingham University). The easy career option for an economist with a strong mathematical foundation is to use those skills to reach conclusions that mainstream economists like: that way you are likely to get published in the “best journals” and to have a successful career. Yanis had chosen the far harder route of using those skills to expose the fallacies in mainstream thinking.

His speciality, when he arrived in Sydney, was debunking a branch of economics known as game theory—which is still a popular pastime for economists today. The archetypal game theory problem is known as “The Prisoners’ Dilemma”: two criminal accomplices are presented with the choice of confessing or denying their crime. If they both deny it, they both get short sentences (because the police don’t have a strong case against them); if they both confess, they both get medium sentences; if one confesses and the other remains silent, then the one who confesses gets pardoned while the other goes serves both sentences. Figure 1 shows the basic setup, and the basic game theory prediction here is that both prisoners will confess.

Figure 1: The single shot Prisoners’ Dilemma

image004The logic is that, while it would be better for them both if they both stayed silent, there is the risk that their accomplice will confess, resulting in a ten year sentence for the one who stays silent. So the rational thing for both of them to do is to confess—thus resulting in 5 years in jail rather than 6 months if they had both remained silent.

John Nash, the developer of game theory, was a mathematician, but his approach was adopted with glee by economists because it gave them another way to prove many things they actually wanted to be true—for example they wanted it to be true that firms would compete with each other in the marketplace, rather than collude, even though collusion resulted in higher profits.

There was just one problem. The Prisoners’ Dilemma applies to a single instance. What happens if this event is repeated, Groundhog Day style, again and again? Then the prisoners will instead decide to remain silent—cooperation rather than ratting on each other is the optimal strategy. And when applied to the theory of competition, it implies that collusion will be the normal outcome, not the competition that mainstream economists actually want to be the case.

The mainstream reaction to this should have been to accept that maybe collusion was the probable outcome in the real world. Instead, they developed the concepts of “backwards induction” and “common knowledge of instrumental rationality (CKR)” which argued that the repeated game would have the same outcome as a “single shot”.

Yanis pointed out that this reworked conclusion involved some pretty tortuous logic. The argument was that, faced with say a 100 round game, the Prisoners’ Dilemma players would work out the best strategy for the last round—which would be to confess, since if your partner didn’t, he’d go to jail for another 5 years while you would go scot free. Then they’d consider the 99th round—where the outcome would be the same—and all the way back to the first, where they’d confess. The same conclusion followed for competition: firms would compete rather than cooperate because of “backwards induction” and the supremacy of competition was restored.

If you’re thinking “baloney” here, good: so was Yanis. He illustrated the fallacy in the mainstream “logic” in this paper with another game in which two players take turns taking a gold coin from table. If a player takes one coin, the other can then take a coin; but if either player takes two coins, the game is over (taking more than 2 was not allowed).

The mainstream conclusion was that, faced with a table containing 1000 coins, the game would end at the first turn when the first player took two coins. This appears ridiculous to a non-economist: surely people would take turns at taking one coin instead all the way through, thus pocketing up to 500 coins each?

Yanis showed that the non-economists were right, because the mainstream conclusion was internally contradictory. It concluded that a “rational” agent would always take 2 coins on the first round—thus ending the game—but reached that conclusion by considering what a rational agent would do in the game’s final round—which could only happen if the players had taken just 1 coin for all the previous rounds, including the first.
Yanis worked out a technical explanation for why a rational agent would choose just one coin—and thus do what non-economists would expect, and what people in fact do when the game is played—and made many other critical contributions to this field.

Since the probability of a crisis became obvious to him from the early 2000s, and he shifted to macroeconomic issues and in particular, what to do to end the European crisis—topics I’ll consider in future posts.

For now, I want to assure you that a good man with a sharp intellect is on the deck of the sad ship Europe, trying to get its misguided captains to change direction. For the sake not just of Greece but of Europe, I wish him every success.

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