thenextwave

Game theory and the king’s new clothes

Posted in economics, politics by thenextwavefutures on 19 February, 2015

Page_236_of_Andersen's_fairy_tales_(Robinson)I’ll admit to being a bit obsessed with Syriza and the Eurozone at the moment (here and here): it is by some way the most interesting development at the moment in both politics and economics. And I’m also interested in the idea that Yanis Varoufakis’ background teaching game theory might have some bearing on the outcome of the talks with the Eurozone, especially now that he has gone out his way, in the New York Times to say that exactly the opposite is true. It’s worth spending a bit of time on this.

Selfish players

In an op-ed article in the NYT, he spelt this out.

“Game theorists analyze negotiations as if they were split-a-pie games involving selfish players. … The trouble with game theory, as I used to tell my students, is that it takes for granted the players’ motives. In poker or blackjack this assumption is unproblematic. But in the current deliberations between our European partners and Greece’s new government, the whole point is to forge new motives. To fashion a fresh mind-set that transcends national divides, dissolves the creditor-debtor distinction in favor of a pan-European perspective, and places the common European good above petty politics, dogma that proves toxic if universalized, and an us-versus-them mind-set.”

As it happens, Bill O’Grady has done a game-theoretical analysis of the Syriza-Eurozone negotiations, and it’s easy to see why the “negotiations” are not going well. This is the pay-off table from Syriza’s side of the desk.

Greece-Greek-Games-4

Source

Obviously in real life, there’s more complexity than this – there are degrees of “caving” or “holding”. And the numbers are just indicative. But the model helps to understand what the dynamics are. O’Grady:

Syriza believes that caving in to the EU will end its political movement before it really begins. Caving in produces the outcome of -100 in quadrants one and three. Thus, its only positive payoff is to press for restructuring at all costs, while the EU caves (quadrant two outcome). At the same time, we think Tsipras believes that the costs to the EU of caving to Syriza aren’t all that high, but a situation in which both parties hold (quadrant four outcome), which probably entails a Greek exit from the Eurozone, is devastating for the EU. … And, most importantly, Germany loses its single currency free-trade zone.

But from the other side of the table, the numbers look a lot different:

greece-greek-games-5

 

Source

So from the EU/Germany/ECB perspective, they expect Syriza to behave the way everyone else does in European negotiations, and also think that a Greek exit from the Eurozone is catastrophic for Greece but not for anyone else. (Which, is, incidentally, a high-stakes call.)

Bill O’Grady again:

From the troika’s perspective, a face-saving outcome in which both parties cave on some matters is the best outcome. They fully expect Syriza to take that option and believe the aggressive comments against extending the current deal or even more “extend and pretend” on debt is just political rhetoric for domestic consumption. Thus, the leaders of the EU keep looking for Syriza to signal a first quadrant outcome. They also believe that a Greek exit won’t be a big deal for the Eurozone but a catastrophe for Greece. … On the other hand, a quadrant two outcome, in which Greece holds and gets its way, while the EU caves, is good for Greece but terrible for the Eurozone. … The German reform effort will be over. Populist parties across Europe will use Syriza’s success to rebel against austerity and EU rules.

Bill’s article is excellent, by the way. It gives a good walking pace reminder of how game theory works, and then goes into some detail on the perspectives of the different actors. I’m not going to summarise it in any more detail, but do recommend that you go and look at the whole thing.

Red lines

Back to the NYT and Yanis Varoufakis, for whom “caving” in this situation is clearly a red line, because of the consequences for the people who elected Syriza to office.

I am often asked: What if the only way you can secure funding is to cross your red lines and accept measures that you consider to be part of the problem, rather than of its solution? Faithful to the principle that I have no right to bluff, my answer is: The lines that we have presented as red will not be crossed. Otherwise, they would not be truly red, but merely a bluff.

But what if this brings your people much pain? I am asked. Surely you must be bluffing.

The problem with this line of argument is that it presumes, along with game theory, that we live in a tyranny of consequences. That there are no circumstances when we must do what is right not as a strategy but simply because it is … right.

There are patterns to politics. A financial crisis typically generates a political crisis, in which the parties that emerge are those who either change their ground or are new parties with new interests. Changing ground, as I have discussed here before in the context of the UK Conservative party, can work well short-term but store up problems for the future.

Shock of the new

The Labour Party’s emergence into power in 1945, after a brief false start in 1929, is maybe a more interesting analogy. A whole lot of ministers came into government for the first time (some had served in the unelected wartime coalition) from different backgrounds and few assumptions about the way that “government” was done. Nye Bevan had left school at 13 and came into politics through the Miners’ Union; Ernest Bevin had been the first General Secretary of the Transport and General Workers Union. They wanted to make a change.

And one of the refreshing things about Syriza, so far, is that it has thrown into positions of political power people who haven’t spent years learning how to play the “corridors of power” games that get politicians such a bad name. (This is, incidentally, one of the reasons why having politicians who have never had work outside of politics is so corrosive.)  They are ‘new’ politicians who are foolish enough to believe that the purpose of being in power is to make a difference. In doing this, they are playing the role of the small boy who points out that the king is in the altogether.

Experts and governments

And the European Union is exactly the worst place in the world to go around pointing this kind of thing out. As Peter Mair argued in his book Ruling The Void, the whole set of institutions of the EU have been designed to ensure that it has the form of a political organisation, but none of the function. There’s a reason why the MEPs have almost no power. Here’s part of Wolfgang Streeck’s review in New Left Review:

Mair’s Exhibit A of a political system of de-politicized expert ‘governance’, specifically constructed to exclude parties, popular democracy and, with them, redistributive politics, is, of course, the European Union, as analysed in the book’s final chapter. … As Mair points out, referencing Robert Dahl’s reflections on opposition, ‘we are afforded the right to be represented in Europe, even if it is sometimes difficult to work out when and how this representative link functions; but we are not afforded the right to organize opposition within the European polity.’

In other words Syriza represents a conceptual challenge to the EU, which has been designed to be ruled, or perhaps managed, as a faux-political space where opposition is squeezed out by a technocracy. And so you get, of course, the kind of games that went on this week, where a draft communique acceptable to Greece is suddenly swapped out for one that was clearly inflammatory (and then there are complaints that these get leaked!)

Both sides, in other words, think the other is making a category error. And this is the other reason why game theory doesn’t work. In game theory, both sides have to be playing the same game.

The image at the top of the post is Heath Robinson’s illustration of the king trying on his new suit of clothes, ans is used with thanks.

 

One Response

Subscribe to comments with RSS.

  1. […] Game theory and the king’s new clothes […]


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: