A game theorist leads Greece's challenge to the austerity doctrine imposed by Berlin. But do his theories make sense?by James Bone / February 19, 2015 / Leave a comment
When Yanis Varoufakis presented his latest book at Columbia University in 2011, sitting in a prime position in the front row was the Talking Heads frontman, David Byrne. The presence of a real-life rock star at a technical discussion of the postwar international system confirmed the Greek economist’s burgeoning celebrity status—and he himself seemed duly impressed. “In my book launch at Columbia tonight David Byrne was in the audience. And asked me to sign a copy,” Varoufakis tweeted. “Now I can die a happy person!”
We now know, of course, that his encounter with Byrne would not be the highlight of Varoufakis’s career. The Essex-educated University of Texas professor, a prolific blogger with a shaved head and muscular physique, won the highest number of preferences in the largest constituency in the Greek election on 25th January and took office as the continent’s most unconventional Finance Minister in the country’s new anti-austerity government, led by the leftist alliance Syriza. Camera-toting teenage girls crushed for a glimpse of him arriving for his first day of work at the ministry on his 1300 cc Yamaha motorbike. He then puzzled his European colleagues by touring capitals in an open-necked electric blue shirt and leather jacket. His casual style prompted Greece’s former Deputy Prime Minister, Theodoros Pangalos, to suggest Varoufakis needed to see a psychiatrist because he always had one hand in his pocket.
The Syriza victory in Greece represents more than just a populist uprising against five years of excruciating austerity. It poses an intellectual challenge to the entire creaking edifice of the eurozone. It asks the question—which is more bankrupt, the Greek economy or the eurozone response? The new government amounts, in many ways, to a “revolt of the academics” that has implications far beyond Greece. Varoufakis is the intellectual standard-bearer of a government that includes a remarkable number of professional academics. The Cabinet includes no fewer than six economists, a law professor, an international relations professor, a mathematician and an emeritus philosophy professor whose last book was on Baruch Spinoza and Ludwig Wittgenstein. For better or worse, it is probably the most educated Cabinet in Europe. As such, Greece under Syriza is a good test of William F Buckley Jr’s conservative maxim: “I’d rather be governed by the first 2,000 people in the Boston telephone directory than by the 2,000 people on the faculty of Harvard University.”
It is easy to be understanding—and therefore perhaps dismissive—of Greece’s protest vote. The economy has shrunk by 25 per cent since the start of the crisis and unemployment has risen to 25 per cent. Greeks have recently been stashing cash in safe deposit boxes in case the government tries to raid their bank accounts, or convert them into devalued drachma, but rumours are sweeping the country that even that hidden cash might be seized. The neo-Nazi Golden Dawn, which is so unreconstructed that it is hardly even “neo,” came third with 6.3 per cent of the vote despite most of its MPs facing criminal charges. Syriza, led by the youthful Alexis Tsipras, won 36.3 percent of the vote—compared to a fifth place of just 4.6 percent in 2009. There is justifiable anger. However, the result also represents a frontal challenge to eurozone orthodoxy and, even more broadly, to economic thought.
Varoufakis is the first heterodox academic economist, a critic of the dominant neo-classical tradition that holds sway in university departments, to make it into power. His ascent sends a warning shot across the bows of conventional economic thinkers and boosts the “post-crash economics” movement that complains that traditional economists failed to foresee the 2008 crash. “It’s a huge deal,” says Steve Keen, an Australian professor who is establishing a heterodox economics department at Kingston University and knows Varoufakis from the new Finance Minister’s 12 years teaching at the University of Sydney. “I am delighted that Yanis is the first person to do it. It’s the most prominent case and if you wanted anyone do it, it would be Yanis because he has the personal attributes.”
Syriza is often wrongly portrayed as “eurosceptic.” While there is a minority within the party who argue for a “euroscepticism of the left,” the main economic policymakers in the government support Greek membership of the single currency. The official line has been dubbed the “good euro” policy; in other words, the euro with more solidarity and less austerity. Party leaders describe themselves as “internationalist.” Varoufakis, appearing on Channel 4 news during his recent visit to Britain, referred to himself as “Europeanist.” However, Syriza is unalterably opposed to what they see as failed German-imposed austerity, arguing that Greece will never be able to repay a debt that has ballooned to 175 per cent of Gross Domestic Product even during a programme aimed at reducing that debt.
That is a stark conclusion that has won increasing support elsewhere, including in the New York Times column of Nobel laureate Paul Krugman and in a letter to the Financial Times co-signed by Nobel winners Joseph Stiglitz and Christopher Pissarides and 16 other leading economists. Martin Wolf has argued in the FT: “Done correctly, debt reduction would benefit Greece and the rest of the eurozone.” Even Reza Moghadem, the former head of the International Monetary Fund’s European department, admitting his own growth projections were wildly optimistic, has called for half of Greece’s debt to be forgiven in return for reforms.
Read more on Greece and the debt crisis:
Do Greece’s demands make sense?
Greece has voted for a new politics, not just a new party
Can Syriza get what it wants from Brussels?
Syriza, a Greek acronym for Synaspismós Rizospastikís Aristerás, or the “Radical Left Coalition,” began as a loose coalition of leftists, greens and social movements preparing for the anti-globalisation protests at the G8 summit in Genoa in 2001. Tsipras, who trained as a civil engineer and worked for a time in his father’s firm, made his name organising sit-ins and demonstrations at his high school and Athens Polytechnic University, where he defected from the orthodox communist part of the more pro-European Synaspismos faction. It is often reported that he took part in the Genoa protests. In fact, according to a fellow activist who was there, the then-ponytailed Tsipras was physically barred from entering Italy. His convoy of Genoa-bound protesters was met on the dock at Ancona by baton-wielding Italian riot police and forced back onto the ferry to Greece. He burst onto the national political scene in 2006 at the age of just 32 ,when he won 11 per cent of the votes in a bid to become mayor of Athens.
Though never an academic himself, Tsipras has surrounded himself with economists trained in Britain and the United States intent on overturning the European Union-mandated austerity programme. His Deputy Prime Minister, Giannis Dragasakis, is a former communist who studied economics at the London School of Economics. Dragasakis, who left the communist party after losing a leadership bid by three votes in 1991, is the only member of the new Cabinet with any previous government experience, having served as Deputy Finance Minister for five months in an interim all-party government from 1989 to 1990. Tsipras’s right-hand man, former high school friend Nikos Pappas, is an economic researcher at the University of Strathclyde, while the new government spokesman, Gabriel Sakellaridis, is a PhD candidate in economics who studied in New York. The new super-economy minister, heading the newly-merged Ministry of Economy, Infrastructure, Shipping and Tourism, is Giorgos Stathakis, a development economist with a PhD from Newcastle University who comes from a minor ship-owning family on the island of Crete, where he is a professor of political economy. The Dutch-born, British-raised, Oxford-educated Marxist economist Euclid Tsakalotos, a member of Syriza’s “red-green” tendency, serves as Minister of International Economic Relations. The new “Minister for Combatting Unemployment” is Rania Antonopoulou, a New School PhD who is a specialist in “feminist economics” at the heterodox Levy Economics Institute at Bard College in the US.
“Until the Greek crisis erupted in 2010, Varoufakis had never published a single page on the Greek economy.”
Despite this array of expertise, Syriza lacked the charisma and pungency of Varoufakis. One eminent Greek economist, who asked not to be named, said that intellectually he stood head and shoulders above the rest of Syriza’s economic team. “If he is a Marxist, he is an unorthodox Marxist. If he is a Keynesian, he is an unorthodox Keynesian. If he is a game theorist, he is an unorthodox game theorist. He is unorthodox at anything,” he said.
The 53-year-old has a bachelor’s degree and PhD from the University of Essex and an MSc in mathematical statistics from Birmingham University. It is a mark of his maverick nature that while at Essex, he became the head of the black students’ union after convincing its members that “black” was a political term that includes Greeks. A frequent sparring partner in debates was his contemporary John Bercow, a rare Conservative at the university who is now Speaker of the House of Commons. After spells teaching at Essex, East Anglia and Cambridge, Varoufakis decided to abandon Britain on the night of Margaret Thatcher’s third election victory in 1987. “It was too much to bear,” he said. He went to teach at the University of Sydney, becoming an Australian citizen. After 12 years, however, his dislike of another conservative leader again prompted him to move on. “In 2000 a combination of nostalgia and abhorrence of the conservative turn of the land Down Under (under the government of that awful little man, John Howard) led me to return to Greece,” he explains on his blog.
Until the Greek crisis erupted in 2010, Varoufakis had never published a single page on the Greek economy. His initial return to Greece was not entirely happy. It required him to serve three months’ national service in the army. His Australian partner left him and took their daughter Xenia back to Australia. But he was “saved from near oblivion,” he says, by his current partner, Greek artist Danae Stratou, with whom he travelled to seven dividing lines around the world from Belfast to Cyprus, Palestine to Kashmir for a video project titled The Globalising Wall. The crisis “energised” him and he began blogging to tell everyone who would listen that Greece was effectively bankrupt and that the bailout would not work.
Varoufakis launched his critique of eurozone austerity in a pamphlet written with the economist and former Labour MP Stuart Holland in November 2010, entitled, after Jonathan Swift, “A Modest Proposal for Resolving the Eurozone Crisis.” Holland’s involvement gave the proposal an interesting intellectual pedigree, since he had served as an advisor to then European Commission President Jacques Delors in setting up the euro. Varoufakis recounts a story about Holland attending a 1991 meeting with Delors and then French President François Mitterrand. In a 40-minute briefing, Delors told Mitterrand that the proposed monetary union needed a fiscal foundation and a growth component in which the European Investment Bank would be allowed to issue bonds. At the end, Mitterrand paused for a moment and replied: “Jacques, of course you are right, but we are not going to do this because [then German Chancellor] Helmut Kohl and I can swing a monetary union. We cannot swing what you are suggesting. And when we are no longer in power in 10-15 years when a major crisis happens, our successors will have the simple choice between doing what you are suggesting or letting the whole thing crumble.” Varoufakis’s and Holland’s “Modest Proposal” updates Delors’s suggestion, calling for the European Investment Bank to use European Central Bank-issued EU bonds to invest in deficit regions.
Ironically, the euro crisis meant the future Greek Finance Minister had again to leave Greece. The PhD programme Varoufakis was teaching on in Athens collapsed, his salary was cut and he needed more money to pay child support for his daughter in Australia, whose currency was soaring. His family began receiving death threats because of his propensity to speak out against Greece’s powerful vested interests.
Varoufakis was recruited to America by James K Galbraith, an economics professor and department chair at the University of Texas who is well-qualified to judge Varoufakis’s place in the economics profession because his father was John K Galbraith, once declared by the Economist to be “the best-known economist in the world.” Galbraith junior met Varoufakis on a lecture trip to Greece in 2011 and invited him to speak in Texas. “I was planning a conference on the eurocrisis in Austin. I thought: if I can get Yanis to come as keynote speaker, everyone will come because everyone wants to meet Yanis. Everyone agreed on that basis,” he explains. The invitation turned into a job.
Galbraith, who became the third co-author of “A Modest Proposal,” calls Varoufakis “sui generis” as an economist and works to break down the “Chinese wall” between the profession and real life. “That didn’t use to be the case in my father’s generation, when economics was a much humbler profession. Economists were much more interesting and accomplished than has grown up in the last generation. It’s the separation from the actual problems of the world. The previous generation had the Depression and the war. This generation has grown up in the cloister and in fact they have been punished for ‘leaving the monastery,” Galbraith says.
Varoufakis gave a similar account of his own career in a 2013 speech: “In every one of the economics departments I served, in England, in Scotland, in Australia, later in Athens, now here in the United States, I enjoyed debunking that which my colleagues considered to be legitimate ‘science.’ At the price of a life which can only be compared to that of an atheist theologian ensconced in a Middle Ages monastery.”
Originally, Varoufakis went to Essex as an economics student. But he ended up transferring to the mathematics department because of the “third-rate mathematics” involved in his original discipline. His academic focus, until the Greek crisis, was game theory—or rather debunking game theory.
Kingston University’s Steve Keen, the author of a book entitled Debunking Economics: The Naked Emperor of the Social Sciences, classifies Varoufakis’s economic thinking as “evolutionary or dynamic.” He explains it by reference to the famous Prisoner’s Dilemma. Imagine two criminals. If neither confesses, both get short terms (because the police have weak evidence against them). If both confess, both get medium sentences. If one confesses first, he gets pardoned and the other gets a long sentence. The traditional assumption is that both criminals, unsure of what the other will do, confess. But Keen argues that is a one-off solution. What if the situation is repeated again and again? The prisoners will, over time, learn that cooperation rather than ratting on each other is the optimal strategy. “When applied to the theory of competition,” he argues, “it implies that collusion will be the normal outcome, not the competition that mainstream economists actually want to be the case.”
If you like parlour games, here is another one that Varoufakis actually wrote an academic paper on, with the catchy title “Rational Rules of Thumb in Finite Dynamic Games: N-person Backward Induction with Inconsistently Aligned Beliefs and Full Rationality.” Two players take turns picking coins from a table of 1,000 gold sovereigns. If one person takes a coin, then the other can take a coin. But if one person takes two coins (the maximum), the game is over. Traditional game theory finds that the first person will immediately take two coins, so ending the game with just two in her pocket. However, Varoufakis’s paper argued that the two will cooperate taking one each until both end up with 500.
Tsipras reached out to Varoufakis last year after he became the best-known face of the anti-austerity campaign. The two are said to have met through a common friend while on holiday on the island of Aegina, just off Athens. Some accuse Syriza of naivete in its negotiations with the rest of the eurozone. “They really are in a world of their own. Syriza has the naive belief that ‘we were elected on this platform and no one has the right to challenge it. Period,’” says Nikos Konstandaras, a columnist and the Managing Editor of Kathimerini, Greece’s leading upmarket newspaper.
However, Varoufakis has tried to craft solutions that encourage collaboration rather than confrontation. His “Modest Proposal” is careful to propose a structure that does not require treaty changes or new institutions. “Unlike Swift, it literally is a Modest Proposal. It does not include eating babies,” Galbraith says. Similarly, his proposal for a debt swap, rather than a debt write-off, was designed to meet the insistence by German and other eurozone taxpayers that they, at least on paper, expect all their money back.
In the game theory of Greece’s negotiations with the rest of the eurozone, the question is whether Germany will pocket the first two gold sovereigns, thus ending the game for Greece. Or whether Berlin will collaborate in order to share the money on the table. It is not at all clear that Varoufakis will win this game—or that Syriza necessarily expects him to.
Intriguingly, the Syriza economist who has been most outspoken in his opposition to the euro, Costas Lapavitsas, an economics professor at London University’s School of Oriental and African Studies, was left out of the new Cabinet. Already, there is speculation in Greece that Lapavitsas, who has in past called for the euro to be replaced by a system of managed exchange rates, is being kept on the substitutes’ bench to replace Varoufakis as Finance Minister if he fails to strike a debt deal with Europe and “Grexit” actually occurs.