Sunday, November 13, 2011

Zero Hedge — Gaming the euro

This post is an interesting application of game theory to the euro crisis. It's a bit long and somewhat wonky if you are interested just in skimming, but it's an interesting read if you are interested in this sort of technical approach and don't mind thinking it through.

I like the way it is framed in terms of the free rider problem. I don't agree with the assumptions about the "free ride," but it is instructive as an insight into how this type of mind looks at the issues, i.e., in which matters like common good are considered aspects of a free ride when  a neoliberal/Austrian view of "fiscal discipline" is taken as the overarching criterion.

The Euro Is Dead


Ryan Harris said...
This comment has been removed by the author.
Matt Franko said...


Their little 2 x 2 matrix they've set up has on the one axis "Behave" and "Cheat".

They will interpret "Cheat" as an external deficit country saying at the beginning of the year we will have a deficit of say 50B, then do some cutting and tax increases. but of course that will lead to increasing savings desires which will put their deficit up to 60B ex post and then they will scream: "Cheat!!"; when it is not 'cheating' it will simply be the public in the deficit country exerting their rights to save NFAs.

So this whole out of paradigm exercise theyve set up here is absurd from beginning to end. they dont have it framed correctly...


Tom Hickey said...

That's right, Matt, and the response in their paradigm will be more austerity, which will further exacerbate the situation until it becomes political unsustainable.

If one looks deeply into their analysis, it's based on the idea that the the primary purpose of money is as a store of value. Given their misunderstanding of monetary economics, this idea mandates "fiscal discipline" to shore up the value of money, even though they essentially admit that it runs over the common good, which they associate instead with the free ride.

What I like about their analysis is that they are unabashedly up front about it. There is absolutely no apology about using unemployment as a tool, which is what austerity does, until in their view, wages and benefits are reduced enough for the developed world to compete with the developing world.

IN this view, the purpose of capital is to generate more capital, and capitalism is the economic system which serves capital, with everything else subordinate to that.

Owing to their misunderstanding of the workings of monetary economics, fiscal austerity has the opposite effect, as it adds to deficits rather than decreasing them.

Underlying this whole analysis is the presupposition that if the workers of the developed world received the same wages and benefits as those of the developing world, the "problem" would go away by itself. Good luck with that, guys.

Matt Franko said...

"the presupposition that if the workers of the developed world received the same wages and benefits as those of the developing world, the "problem" would go away by itself."

It would become instead a race to the bottom?

Tom Hickey said...

The race to the bottom is in full swing now. That's what "austerity" is really about. TPTB could care less about "fiscal discipline" as their advocacy of tax cutting on themselves, deficit be damned, goes to show. "Austerity" is about gutting "the welfare state" and cutting wages to "competitive" levels.