The BBC’s Inept but Revealing Attempt at a Game Theoretic View of Greek Crisis

[Jefferson23]

Posted on June 26, 2015 by William Black



The BBC came up with a good “hook” for a story on the troika’s assault on the Greek economy and people. “Yanis Varoufakis, the Greek finance minister, spent his academic career … studying game theory.” Professor Marcus Miller, a UK economist (U. Warwick) wrote an article for the BBC premised on how Varoufakis would apply game theory to Greece’s negotiations with the troika (the IMF, ECB, and the European Commission). Miller is a colleague of the great Robert Skidelsky and has co-authored with him an article explaining the economic illiteracy and self-destructive nature of the troika’s (and UK’s) infliction of austerity in response to the Great Recession.

The BBC, however, is such a great fan of austerity that one rarely reads why the vast majority of economists think that using austerity to respond to a Great Recession is akin to the quackery of bleeding a patient to make him healthier. Miller’s article in the BBC about game theory has the wrong title (recall that the author often does not get to choose the title), the wrong game, the wrong concept, and the wrong payoffs. The title of the article is: “Can game theory explain the Greek debt crisis?” The article does address that issue. It is limited to the issue of the new Greek government’s negotiations with the troika concerning a crisis that they inherited.

The game that Miller uses is the “prisoner’s dilemma.” That is the wrong concept and the wrong game and should actually be called the “prisoners’ dilemma” because it requires at least two prisoners. The “prisoners’ dilemma” game is used to explain (1) why cooperative behavior – by criminals – would be their optimal strategy, (2) why prosecutors and the police should prevent that cooperation, and (3) how prosecutors and the police can shape the prisoners’ incentives to encourage them to confess. As conventionally pictured, and Miller falls into this trap, the game does a poor job of explaining the third point. Real life prosecutors, police, and criminologists in the U.S. do a far better job of optimizing the incentives than do economists – and did so long before game theory was developed.

Here is Miller’s explanation.

The most famous game of all is the Prisoner’s Dilemma. Imagine two prisoners have to choose between confessing and staying silent. If they both stay silent, they both go to jail for one year. If one confesses and the other stays silent, the first goes free and the second gets 20 years. If both confess, they both get five years.

in full: http://neweconomicperspectives.org/2015/06/the-bbcs-inept-but-revealing-attempt-at-a-game-theoretic-view-of-greek-crisis.html#more-9555

[Blue_Tires]

1. Meh...Greece dug their own hole...

[Jefferson23]

2. A Greek Morality Tale 2/3/2015

NEW YORK – When the euro crisis began a half-decade ago, Keynesian economists predicted that the austerity that was being imposed on Greece and the other crisis countries would fail. It would stifle growth and increase unemployment – and even fail to decrease the debt-to-GDP ratio. Others – in the European Commission, the European Central Bank, and a few universities – talked of expansionary contractions. But even the International Monetary Fund argued that contractions, such as cutbacks in government spending, were just that – contractionary.

We hardly needed another test. Austerity had failed repeatedly, from its early use under US President Herbert Hoover, which turned the stock-market crash into the Great Depression, to the IMF “programs” imposed on East Asia and Latin America in recent decades. And yet when Greece got into trouble, it was tried again.

Greece largely succeeded in following the dictate set by the “troika” (the European Commission the ECB, and the IMF): it converted a primary budget deficit into a primary surplus. But the contraction in government spending has been predictably devastating: 25% unemployment, a 22% fall in GDP since 2009, and a 35% increase in the debt-to-GDP ratio. And now, with the anti-austerity Syriza party’s overwhelming election victory, Greek voters have declared that they have had enough.

So, what is to be done? First, let us be clear: Greece could be blamed for its troubles if it were the only country where the troika’s medicine failed miserably. But Spain had a surplus and a low debt ratio before the crisis, and it, too, is in depression. What is needed is not structural reform within Greece and Spain so much as structural reform of the eurozone’s design and a fundamental rethinking of the policy frameworks that have resulted in the monetary union’s spectacularly bad performance.

Greece has also once again reminded us of how badly the world needs a debt-restructuring framework. Excessive debt caused not only the 2008 crisis, but also the East Asia crisis in the 1990s and the Latin American crisis in the 1980s. It continues to cause untold suffering in the US, where millions of homeowners have lost their homes, and is now threatening millions more in Poland and elsewhere who took out loans in Swiss francs.

Given the amount of distress brought about by excessive debt, one might well ask why individuals and countries have repeatedly put themselves into this situation. After all, such debts are contracts – that is, voluntary agreements – so creditors are just as responsible for them as debtors. In fact, creditors arguably are more responsible: typically, they are sophisticated financial institutions, whereas borrowers frequently are far less attuned to market vicissitudes and the risks associated with different contractual arrangements. Indeed, we know that US banks actually preyed on their borrowers, taking advantage of their lack of financial sophistication.

Every (advanced) country has realized that making capitalism work requires giving individuals a fresh start. The debtors’ prisons of the nineteenth century were a failure – inhumane and not exactly helping to ensure repayment. What did help was to provide better incentives for good lending, by making creditors more responsible for the consequences of their decisions.

Read more at http://www.project-syndicate.org/commentary/greece-eurozone-austerity-reform-by-joseph-e--stiglitz-2015-02#lQVcRV38BE6XlzBW.99

[salib]

3. Yep. Blame the poor for their poverty.

Blame the exploited for being in their situation.

Of course. More right-wing talking points.

[Blue_Tires]

7. You don't fuckin' know me, so don't pretend that you do...

[salib]

9. I do not know you.

And did not claim that I do.

Did not say a thing about you.

Just commenting on your comment. Not you.

BTW, I took you over two days to decide to respond with that?

[Warren Stupidity]

4. at gunpoint.

[Blue_Tires]

6. Kind of like how the Greeks did the Macedonians for almost 20 years?

[Warren Stupidity]

8. two wrongs make a right?

it is an interesting idea but in practice it just results in more wrong.

[fasttense]

5. Yeah because borrowing more money to make payments

On older loans is a smart move. All the money loaned to Greece after the world wide economic crash was to service the debt that was fraudulently obtained by currupt politicians and banksters. It sbould have been forgiven like the German debt afterWWII.