Sticking to the rules

Since my last post was about games and rules, let me present a passage from an interview from the Sueddeutsche Zeitung, one of the better German newspapers:

"Die Regierungschefs der Euro-Zone und die EZB haben alle geltenden Stabilitätsregeln gebrochen, seien es Schuldenobergrenzen, das Schuldenankaufsverbot oder das Beistandsverbot. Hier gelten keine rechtsstaatlichen Regeln, sondern es herrscht Faustrecht. Warum sollten neue Regeln einen Fortschritt bewirken? Regeln zudem, die einstimmig beschlossen werden müssten, also auch von den Problemstaaten? Eine solche Entwicklung halte ich für extrem unwahrscheinlich."

"The heads of government in the Euro-Zone and the ECB have broken all of the present stability rules, whether it was the upper debt limit, the prohibition of buying debt or the no-bailout clause. Here we do not have the rule of law but the rule of force. Why should new rules bring progress? Rules, moreover, that have to be agreed to by all parties, including those countries with a debt problem? I see that as being highly unlikely" (my translation)

http://www.sueddeutsche.de/geld/2.220/streit-um-die-gemeinschaftswaehrung-der-euro-wird-zusammenbrechen-1.1151907

This gives us no ground whatsoever for optimism, and indeed that was the intention of the person being interviewed, Stefan Homburg, Professor at the University of Hannover. Sadly it is very difficult to fault his argument, which is two-fold.

Firstly, he is doubtful that anyone who has broken rules in the past can be trusted to keep them in the future. And secondly, that countries with severe problems are not going to agree to new rules that will only make their situation more difficult.

And if that wasn’t enough he presents a third argument not quoted here, that we are seeing a fight between those financing the debt in Greece (and other countries) and the tax-payer. And what is the fight about? It’s not difficult to guess. The banks are trying to make the tax-payer bear the burden. This is what the Germans call privatising profits and socialising losses. So that when he speaks of the rule of force it seems to be a thinly veiled claim that it is not governments who make the rules, and break them if need be, but the financial sector.

In other words, he seems to be arguing that governments are not only unwilling to make rules but unable to enforce them, although that is what I thought they were there for.

The economic system

Economists regard the economy as a system. This could have something to do with the fact that economics is regarded as a science, at least by its practitioners.

Let us take an argument that caused something of a stir:

"But maybe this is an opportunity to reiterate a point I try to make now and then: economics is not a morality play. It’s not a happy story in which virtue is rewarded and vice punished. The market economy is a system for organizing activity — a pretty good system most of the time, though not always — with no special moral significance. The rich don’t necessarily deserve their wealth, and the poor certainly don’t deserve their poverty; nonetheless, we accept a system with considerable inequality because systems without any inequality don’t work. And before the trolls jump in to say aha, Krugman concedes the truth of supply-side economics, that’s not an argument against progressive taxation and the welfare state; it’s just an argument that says that there are limits. Cuba doesn’t work; Sweden works pretty well." http://krugman.blogs.nytimes.com/2010/09/28/economics-is-not-a-morality-play

If we do Paul Krugman the favour, which many of his detractors do not, of being intelligent enough not to be advocating war if it is good for the economy, then it is more probable he is firstly arguing that a system is just that – a system. It has no innate sense of justice, no regard for doing right or wrong. Going beyond that he might defend his position by saying that it would impair our ability to see the facts if we closed our eyes to what we find morally repulsive. In the economists eyes this would be bad science in much the same way that an anthropologist must not prejudice his view of mankind by taking a moral stance.

Somehow or other, this sort of argument always seem to imply that taking a moral view of how the system should work is generally futile and quite possibly harmful. Not that we should be neutral as to how the system works. Krugman prefers the Swedish system to the Cuban – because it works.

Once again we suspect that what Krugman means by "works" is "does not break down". This is subtle but inherent in a systems view of things. The economic system is complex and difficult to keep in a stable state. That is the way complex systems are, whether we are talking about software systems or family systems or nation systems. If they are functioning in any acceptable way we should probably be satisfied and leave them alone. Tinkering with them is unlikely to make things better and could lead to disaster.

As a means of stimulating our thinking let me propose an alternative – the economy is a game. Many will find it seemingly frivolous to use such a term, but there is, after all, such a thing as game theory and the Stanford Encyclopedia of Philosophy has a whole article on it.

Now, if someone wants to they can also keep morality out of game theory, but surely one of the fundamental complaints about our present financial system is that too few people are "winning" and far too many are "losing". And one of the advantages of looking at the economic system from a game theory perspective is that it gives us ground for dissatisfaction with the system and at least a possibility of change.

If you want to change the game change the rules. And at present one has to suspect that nothing else will help. At the moment the game is stacked in favour of the banks and big companies, and they are winning. In order to turn the tide, there seem to be some aspects of the present system that must be forbidden.

At this juncture it becomes interesting to see how people react to such a suggestion, and I’m not the only one making it. The systems thinker will be considering what happens when we interfere with the interaction of free agents in the system by implementing some sort of legislation. He will find this a very difficult question to answer, after all it is a very complex system, and most probably he would prefer it if the legislator would keep his sticky fingers out of it. It is not that he advocates an untrammeled free-for-all, it is just that he is finding it difficult calculating the effects of any legislative action.

And this gives us another ground for being dissatisfied with the present state of affairs. It is a game too complicated by far, and a dangerous one too. Thus, even if we feel that morality clouds our judgement, which I don’t, then there is still a great deal to be said for simplifying the game. This would allow us to make mistakes whithout thereby being brought to the brink of disaster. Which is what the present system is doing.

There’s no good time for reducing debt

Well, what have we learnt so far from the Euro crisis? There is a song that has been sung so often over the years by German employers – this is not the time for wage increases. Whatever the time, it is not the time. The same can be said for cutting government spending, and Paul Krugman has been saying it:

What, Krugman asked, do these events have in common? “They’re all evidence that slashing spending in the face of high unemployment is a mistake. Austerity advocates predicted that spending cuts would bring quick dividends in the form of rising confidence, and that there would be few, if any, adverse effects on growth and jobs; but they were wrong.” http://biztech.caledonianmercury.com/2011/03/29/nobel-laureate-krugman-questions-uks-policy-of-unforced-austerity/

What he means, and has also said, is that when the economy is not going well we will only make it worse by cutting spending. And he is probably right. At least this is what we are seeing in Greece. And he proposes a two phase approach, stimulate the economy now and reduce debt later. But later never comes. It never has in Germany and I suspect it never will. 

But surely we reach a point in time where we have no other option but to reduce debt. That’s what you’d think. But I fear we have gone beyond that point and are now in an almighty mess .

To illustrate my point from an area that I know more about, there was a software system written for the inland revenue in Germany. It cost somewhere between  250 and 900 million Euros and was then abandoned. It is only one example, There are, sadly, others. Now, don’t you think there was a debate at the time as to how much more money would be necessary to bring the project to a successful conclusion. I’m sure there was. And I’m equally sure that nobody could offer a reasonable assurance that a reasonable sum would in fact lead to a usable system.

This is what I mean by saying that we are in an almighty mess. Nobody seems able to offer a course of action that offers any reasonable assurance that, at the end of the day, all will be well.

In the end, the German authorites simply wrote off the system. They probably had no alternative. But its not that easy to “write off” the Euro. We are in a situation where there is no pain-free exit strategy. Letting Greece go bankrupt will cause a great deal of pain. But trying to keep Greece in the Euro is also going to cause a great deal of pain. And what we precisely mean by a “great deal of pain” is something I prefer not to think about. But that won’t help me either.

So what have we learnt so far. The way the Salami Tactic works is by presenting us with a small choice and then repeating that choice. If the Russians invade Germany and simply take 20 Kilometers – is it really worth starting a third world war for 20 Kilometers? So then they advance and take another 20 Kilometers, and we are faced with the same decision. We then have no rational reason for changing the choice we made. And thus the Russians continue, slice for slice, until they have taken all of Germany. This was the the so-called Fulda Gap scenario.

The frog in a pot of water faces the same dilemma. As the water gets hotter and hotter he never finds the time to jump out and gets boiled. Which was, quite obviously, a mistake.

Much the same has been happening with european debt. It just keeps rising slowly and we keep saying that this is not the appropriate moment to cut spending. Which, in my humble opinion, is also a mistake.