What does Yanis Varoufakis want?

2 03 2015

That’s the title of a great blog post about Greece’s current finance minister.

By training, Varoufakis is not an economist, but a mathematical statistician. And similar to many academics who migrated from the ‘hard’ sciences to economics, Varoufakis has built a career on ridiculing economists’ inferior abilities in math and statistics. Also economists’ too simplistic belief in the miracles of the markets, their tendency only to see positive sides to technological progress, and the idea that to do economics is to build simple mathematical models, is derided by Varoufakis in witty and rhetorically gifted prose. At the same time, Varoufakis has been employed by economic faculties for some twenty-five years, in which he hence felt like an “atheist theologian ensconced in a Middle Ages monastery.”

The whole blog post is well worth reading, even if you are less fascinated by Yanis Varoufakis than I am.

The New Greek Finance Minister on the Scottish Enlightenment, Hayek, and Spontaneous Order

30 01 2015

As most readers of this blog will know, Greece recently elected a hard left-wing government. On the right, there is a tendency to regard all left-wing politicians as economically illiterate morons who think nostalgically about Soviet-style central planning. Indeed, there is a tendency to caricature leftists as monolithically hostile to and ignorant of business.  The new Greek finance minister, Yanis Varoufakis, demolishes this stereotype, as he is smart, worldly thinker with a PhD in economics and wide-ranging interests. Varoufakis is well-know for his study of software company called Valve that operates without most of the managerial hierarchies that are typically found in firms. His research has important implications for how we think about successful organisations or all types, ranging from the military and the church to private companies and indeed the economy as a whole. In his research on Valve, Varoufakis drew on the ideas of F.A. Hayek, who had demonstrated the impossibility of successful central planning by pointing out the sheer complexity of the modern economy and the amount of knowledge embedded in prices. Varoufakis took the ideas of Hayek, who is generally regarded as a conservative (i.e., liberal) thinker and applied them to the study of a single firm.

In a fascinating blog post on the Valve company website, Varoufakis gives us a short intellectual history of the antecedents of Hayek’s ideas.

The idea of spontaneous order comes from the Scottish Enlightenment, and in particular David Hume who, famously, argued against Thomas Hobbes’ assumption that, without some Leviathan ruling over us (keeping us “all in awe”), we would end up in a hideous State of Nature in which life would be “nasty, brutish and short”. Hume’s counter-argument was that, in the absence of a system of centralised command, conventions emerge that minimise conflict and organise social activities (including production) in a manner that is most conducive to the Good Life. Steadily, these conventions acquire a moral dimension (i.e. there is a transition from the belief that others will follow the established conventions to the belief that others ought to follow them), they become more evolutionarily stable and, in the end, function as the glue that allows society to be ordered and efficient albeit without any centralised, formal, hierarchy. In short, spontaneous order emerges in the absence of authoritarian hierarchies.

Hume’s views influenced one young man in particular: Adam Smith, the economists’ patron saint. Indeed, Smith’s ‘invisible hand’ is no more than an application, and extension, of Hume’s spontaneous order to market-societies. Smith’s argument, in case we have forgotten, is that markets are an example of spontaneous order, where price movements (in reaction to market forces) coordinate individual efforts in a manner that, as if by the help of some invisible hand operating behind our backs, promotes the public good (much better than any ruler who strives to promote it).

While the concept of a ‘spontaneous order’ harks back to Hume and Smith, it was Friedrich von Hayek, the doyen of modern day libertarians, who coined the term. Taking his cue from Adam Smith, Hayek used the ‘spontaneous order’ idea as a stick with which to beat into submission all ideas in favour of economic planning (socialist planning in particular) and all arguments in favour of an activist state.

You can read the entire blog post here.

I saw several thoughts about Varoufakis. First, the fact that someone is a quasi-follower of Hayek is a member of a hard left party shows just how far Hayek’s ideas have permeated across the political spectrum. Second, I bet that  Varoufakis has some good ideas for structural reform in Greece. Cutting the bloated military budget would be good start.  Perhaps he will try to make government  ministries more like Valve. Third, I wonder if the realities of Cabinet government will prevent Varoufakis from implementing his ideas.

You can listen to Varoufakis talking about Valve here. You can read more about him here, here, and here.

Albrecht Ritschl on the Marshall Plan, Greece, and the Eurozone

17 06 2012

Albrecht Ritschl, who is an economic historian at LSE, has published a great blog post comparing the help Germany has given to Greece in recent years with the financial assistance packages offered to Germany at various points in the 20th century (the Dawes Plan of 1924, the Young Plan of 1929, and the Marshall Plan of 1948). As we all know, German taxpayers have footed the lion’s share of the bill to assist Greece and other Eurozone countries. Defenders of this arrangement argue that the poorer Eurozone countries have a moral claim on Germany because the latter became rich as a result of Marshall Plan assistance from the United States. The use of this historical analogy has provoked widespread debate.

Poster promoting the Marshall Plan.

Ritschl’s blog post of yesterday was prompted by a 12 June  New York Times piece in which the economist Hans-Werner Sinn of the University of Munich invokes comparisons with the Marshall Plan to defend Germany’s position against Eurobonds, the pooling of sovereign debt within the euro zone. Sinn argued that Germany has given Greece vastly more than it was itself given by the United States.

Ritschl questions Sinn’s numbers, arguing that he has underestimated that amount of aid given to Germany under the Marshall Plan and has overestimated that amount of help Germany has given to Greece. According to Ritschl, the financial assistance packages given to Greece in recent years are more like the Dawes Plan of 1924 than the generous Marshall Plan of 1948.

Here is the key part of Ritschl’s piece:

Under the Dawes Plan of 1924, Germany’s currency had been put back on gold but Germany went on a borrowing binge. In a nutshell, Germany was like Greece [in the early 2000s] on steroids. To stop this, the Young Plan of 1929 made it riskier to lend to Germany, but the ensuing deflation and recession soon became self-defeating, ending in political chaos… As far as historical analogies go, what Southern Europe received when included in the euro zone was closer to a Dawes Plan. And just like in Germany in the 1920s, the Southern Europeans responded with a borrowing spree. In 2010 we didn’t serve them a Marshall Plan either, but a deflationary Young Plan instead. This latter-day Young Plan is not even fully implemented yet. But we see the same debilitating consequences its precursor had around 1930: technocratic governments, loss of democratic legitimacy, the rise of political fringe parties, and no end in sight to the financial and economic crisis engulfing these states, no matter how many additional aid packages are negotiated. Woe if those historical analogies bear out.

Hotel being built in West Berlin with Marshall Plan money, 1949. Note the number of sub-contractors (windows, wiring, etc) who were involved in this project.

Based on my limited reading in this area, I’m inclined to think that Ritschl has a better argument than Sinn. I understand the frustration many German taxpayers feel with Greece. Much more needs to be done if this currency union is going to work. (In fact, I’m not convinced that a currency union of territories in which different languages are spoken is compatible with democracy). However, I think that the attitude of much of the German populace towards Greece and other poorer parts of the EU suggests a distinct lack of awareness of and gratitude for the help Germany was given in its hour of need in the late 1940s. I note with interest that Professor Sinn was born on 7 March 1948, less than a month before President Truman signed the Marshall Plan into law.

The US law authorising the Marshall Plan.

The Greek Referendum and the Globalization Paradox

3 11 2011

I teach a class on the history of globalisation. It is designed for both students doing degrees in history and IR and politics students who want some historical background. Right now, the students in this class are reading Dani Rodrik’s book The Globalization Paradox.

One of the core arguments of this book is that there is a fundamental incompatibility between globalization on the one hand and democracy and national sovereignty on the other. Participation in the global economy sometimes requires governments to impose economic policies that often go against the will of the majority of the people living in the country. We can live in a globalized world or a world of sovereign and democratic nation states, but we can’t have both, at least according to Rodrik.

I’m not entirely convinced by Rodrik’s thesis. However, in the last few days, we have seen a striking illustration of this point. Greece was recently offered an assistance package by the other European countries that was conditional on the Greek government, which is nominally socialist, making massive structural reforms. These reforms, which involve tax increases, mass privatisation, and cuts to benefits, are unpopular with Greeks. Many Greeks resent the fact that economic policy in their country is now being set by foreign politicians, which seems like an affront to the idea of national sovereignty and downright undemocratic. However, Greece’s leaders agreed to the deal in the belief that it is absolutely necessary for the country’s continued participation in the Euro, which has facilitated economic exchange between Greece and the outside world.

After his return to Greece, the Greek PM decided to hold on referendum on the austerity package he had negotiated with the other European leaders.  In effect, he was reneging on the deal he had agreed behind closed doors with the other EU bigwigs. You can justify the decision to call a referendum on the grounds that it is democratic, but in practice giving the people a say threatens the policies necessary for Greece to remain part of the Eurozone, and possibly the EU as well. Whether leaving the Eurozone and the EU would be good for Greece is, I suppose, a value-laden question. Most anti-globalization people would cheer this outcome as a victory for people power. Most neo-liberals would decry this move as a step backwards to autarky and nationalism. What is clear is that democracy, or at the very least direct democracy, isn’t always compatible with pro-globalization policies.

To my mind, this is a fantastic “teachable moment.” I’m looking forward to hearing what the students have to say about this complex issue with obvious parallels with the breakdown of the gold standard.