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OpEdNews Op Eds    H2'ed 6/30/15

The BBC's Inept but Revealing Attempt at a Game Theory View of Greek Crisis

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The oddest aspect of Miller's description of his hypothetical application of what he terms the "prisoner's dilemma" to Greece's negotiations with the troika are the "payoffs" he assumes to the different decisions. His description makes no sense given his article with Skidelsky.

Imagine Greece moves first to avoid default by putting a plan on the table. This plan involves new taxes on the wealthy and changes to pensions - avoiding spending cuts and and having some of its debts written off in exchange. If this plan is accepted by the rest of the eurozone, then Greece is content. Let's give its payoff a score of 1.

To work out how the rest of the eurozone will respond, one has to see what they stand to gain by accepting Greece's plan, or by rejecting it.

If the eurozone accepted this deal, the monetary union would remain intact, but it would have to ease its strict rules on fiscal policy and take a loss on holdings of Greek debt. Let's give the eurozone payoff a score of . So the overall payoff is (1, ).

But Miller and Skidelsky have explained why these payoffs are incorrect. They have explained that if the EU were to end austerity as a response to a Great Recession the results for the EU would be enormously positive. So, the payoff from a cooperative "game" with Greece that would end self-destructive austerity would be exceptionally positive for the EU and positive for Greece. The EU is much larger than Greece, so its payoff from cooperating with Greece would be far larger than Greece's payoff. Miller also knows that it is wrong to think that the EU would lose due to "having some of its debt written off in exchange." Like other creditors, the EU would get more from cooperating with Greece and negotiating a TDR than forcing Greece into a default on its debts. TDRs are negotiated routinely in the private sector because cooperative "games" benefit both parties. So, "the overall payoff" of a cooperative "game" with Greece would be something on the order of (1, 5). Both Greece and the EU would gain, but the EU's gain would be much larger. The EU's gain would be greater still if it were to enter into similar cooperative "games" with Spain, Italy, Portugal, and the Baltic states.

Conclusion

Austerity is a coercive, non-cooperative "game" that makes both parties worse off (but aids the EU's worst politicians). It is terrible economics, and represents a "dismal [non] science." Game theory is largely devoted to demonstrating the benefits of cooperation. Precisely because Varoufakis is an expert in game theory, and as we can see throughout the new Greek government's negotiations with the troika, the effort has been to try to get the troika to escape from its self-destructive dogmas and debilitating political urge to punish the Greek people, and see that it is in the interests of the Greek people and the peoples of the EU to cooperate by ending austerity and negotiating a TDR.

The troika's game theoretic strategy in dealing with the 100 million people of Spain, Italy, and Greece that it has gratuitously forced into Great Depression levels of unemployment is a nasty variant of the "Dictator" game. The conventional dictator game works like this. The dictator makes an offer to divide up $1. Economists define his "rational" offer as 99 cents for him, and one penny to the other player. The other player gets only one choice -- he can refuse or accept the dictator's offer. If he rejects the offer he gets nothing. Economists define the recipient's rational response as accepting the penny. But there are three striking results of studies of people's response to the dictator game. First, when the dictator offers a penny, or any very unfair division, people overwhelmingly reject the offer even though they know that this will mean they get nothing. Second, people playing the role of the dictator typically offer to split the $1 evenly, which leads to routine acceptance. Third, the exception to this result is economists and economics majors. They are much more likely than human beings to respond by being nasty little dictators and passively accepting drones who agree to take a penny. Normal human beings care a great deal about fairness and are willing to suffer personal losses rather than give in to dictators like the troika.

The language of the troika and of German politicians about the troika's mode of dealing with the Greek government is strikingly similar to the dictator game. But there is a vital way in which the troika's game theoretic approach is far worse than the dictator's game. In the conventional dictator's game the other party is made better off, albeit by only a penny. The troika insists on making Greece worse off by insisting on austerity and trying to block a cooperative TDR that would benefit the creditors and the debtors. The game that the troika is playing against the people of Grace and the EU embraces all the imperialism inherent in the dictator's game -- but it is a "negative sum" game that makes the peoples of Greece and the EU worse off. Cooperative games typically are "positive sum" games that make both parties better off.

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William K Black , J.D., Ph.D. is Associate Professor of Law and Economics at the University of Missouri-Kansas City. Bill Black has testified before the Senate Agricultural Committee on the regulation of financial derivatives and House (more...)
 
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