Greece, Acemoglu and Robinson

Recapping on tweets today.

The dominant narrative in discussions of Greece is that if Greece wants further relief from sovereign debt, those who pay for it want something in return, in particular something that makes it less likely that Greece will have to be subsidised again.  The way creditors see it, that something is the catch-all ‘structural reform’.  Which means changes that bring the institutions and markets of Greece closer to the norms of European capitalism.

Given that, many watching Syriza’s opening salvos at the head of Government have been dismayed by them announcing that they will raise the minimum wage, halt privatisations, and hand out free food and energy to those in poverty.  These things seemingly lower the natural rate of output in Greece.

However, if you look at this through the lens of Acemoglu and Robinson’s account of institutions and markets, this may not necessarily be as bad as it looks (from the point of view of the institutions-free neoclassical account of economics).

In particular, it may not be right, as A&R pointed out, to think of a quasi-market system like Greece, where public and private sectors are the outcome of complex power-plays between social groups, as something that could be brought towards a capitalist system by undoing what we would think of as ‘distortions’.

A classic example, understood before A&R brought out their book, is that it may be unwise to privatise state functions into a private sector that is not a functioning market, but a power-play between private elites who even have their own violent enforcers.  Responding to my tweets, Tomas Hirst pointed to Russia, and the naivety of Western advisors leaping in after the fall of the Soviet Union;  Alan Beattie cited the privatisation of Mexican telecoms company Telmex (which, Alan points out, enriched Carlos Slim).

For the sake of argument, let’s suppose that the key thing to achieve first, to begin a movement of Greece towards a functioning mixed economy welfare state, is undoing the power of ‘the oligarchs’ [it’s starting to sound ridiculous recycling that label, but, in the absence of a smarter one…].  And suppose that achieving that requires a sustained and powerful political coalition of forces.  Well then it may well be efficient in the long run for the Government to do all kinds of things that, superimposed on an otherwise efficient Western economy would do harm, if it buys loyalty for that long fight.  Once those elites are defeated [whatever that means], and the coalition has served its purpose, the apparently harmful loyalty gifts [the ‘distortions’] can be taken back, and in the expectation that the losers will be compensated by the benefits that flow from unlocking true, glorious capitalism!

Of course, Syriza may not see things this way.  They may have other motives for halting privatisation.  They are a union of Marxists of different persuasions, after all, each of whose philosophies responded in different ways to the dying convulsions of Soviet communism.  But so what?  If their actions have the unintended effect of attacking the key non-market-distortion first, the Marxist program can be embraced, rather than derided, if it buys a better chance of long-term mixed-economy-welfare-statism taking root. In fact, one could adopt a conspiracist position on this, imputing an ironic form of false-consciousness on the part of Syriza and view Marxism as part of the necessary glue to keep a powerful coalition together to tackle the elites who control the commanding heights of the ‘state’ and ‘private’ sectors.

[State and private in quotes because in a quasi-market economy apparent ownership does not tell all.  False consciousness dubbed ironic because Marxists view capitalism as infecting its worker-bees with the false consciousness of liberalism, in order to preserve the status quo of class relations.  Here benign capitalists infect people with Marxism, not liberalism, to defeat oligarchic despotism, and deliver the fruits of  capitalism].

I’m not suggesting that Syriza’s plan corresponds to an institutionally literate reform program that will ultimately give birth to enlightened capitalism.  But neither should one dismiss it out of hand using the neoclassical logic that adding a distortion to an undistorted, institution-free economy makes things worse.

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6 Responses to Greece, Acemoglu and Robinson

  1. root_e says:

    “adding a distortion to an undistorted, institution-free economy makes things worse.”

    Got an example of an undistorted, institution-free economy on this planet?

  2. Bill Wells says:

    Tony,

    I agree entirely with you that there is more than one way to achieve economic success. All markets need rules and once you establish rules then you are into the theory of Secon Best. And in the theory of Second Best economic success only tends to occur when the market rules and system are consistent with the social welfare function of the country. Which, in turn is usually best delivered by democracy – reflecting the views and beliefs of the people.

    For example, in a labour market context the OECD in its 2006 Reassessment of the Jobs Study concluded in its editorial to the 2006 Employment Outlook.

    ‘Finally, experience shows that there is no single golden road to better labour market
    performance. There is more than one model of success to hand from which to take
    inspiration to fit specific national circumstances and history. However, this does not imply
    that anything goes. The successful performers share some common features, not least an
    emphasis on macroeconomic stability, adequate incentives for all labour market
    participants and strong product market competition.’

    And as I argue in a comment to one of your previous blogs [link below] I think that there may be signs that – in the labour market at least – Greece may be starting to develop an effective system which has delivered over the past year a improvement in employment rates and one that has been faster than the EU average.

    https://longandvariable.wordpress.com/2015/01/28/post-syriza-post/

    Bill Wells

    • Tony Yates says:

      Thanks for your comments Bill. I hope you get your own blog going soon [and I don’t mean that as if to say ‘stop commenting on mine’!] and advertise it with a twitter feed. I think the Greek labour market is a basket case in many respects. Much of it riddled with ‘it’s not what you know but who you know’, and bureacracy, with an emerging market phenomenon of too many small and informal businesses. And terrible under-employment too. But it’s interesting to read your push back.

      • Bill Wells says:

        Tony,

        Thanks for the prompt I will get around to not piggy-backing on your blog.[Sorry]

        However, I thought that I would comment on the Greek labour market now there seems to have been some sort of deal. First, I think that the improvement in the Greek labour market is one of change rather than the level. A pre-recession employment rate (60-64) level of 60-61% was still substantially below even the low EU average of around 65-66% and much lower than some of the best performers. And the time it has taken for the employment rate to begin to rise has also not been good. It is, however, better that the circa 55% at the turn of the millenium and it does look like the employment rate is now rising.

        And it may be that the structural features that you identify are the the reasons why the relative structural position of the Greek labour market is relatively poor compared to other countries – although I argue that there are signs that it has improved over time. But I think that it is more important that the Greek people decide that these are the important elements that need structural reform. And one reading of the agreement with the EU is that they largely agree with you and want to focus their structural reforms in roughly the same areas as you identify.

        What I hope is that the outcome of the negotiations is that, as Frances Coppola, suggests the key element of the deal is that al the muliti-national organisations TRUST the Greek government to correctly identify the problems that Greece face and also TRUST them to deliver on those reforms. [Of course there will need to be some monitoring of this rights and responsibility agenda.]

        As I continue to argue – in the labour market at least – it is really important to allow subsidiarity in structural or micro-economic elements of the economy and listen to the politicians who are closest to the people. It may be that the lesson from this period is that the structural reforms were not too tough for Greece but rather that they were the ‘wrong type’ of reforms. And after the Greek people have spoken the reforms are being recalibrated. In this Germany and other countries might remember that their structural reforms in the past were very ‘German’ and have worked. And that, therefore, they ought to be more receptive to ‘Greek’ reforms.

        I have less to say on macroeconomic areas but am very concerned with the current debate from Simon Wren-Lewis (and to some extent you) that there is one agreed theory about what the objective should be and also what the best route to achieve that objective is. In particular, it seems to me that there is a danger that we consider the German approach is wrong, outdated etc. Yet, It may be that the social welfare function of the German system places greater weight on stability, automatic stabilisers and keeping inflation down – perhaps because of its history – than the Anglo-Saxon approach of ‘activism’.

        But whatever macroeconomic stance is taken it is crucial to ensure that structural policies have elements of subsidiarity. This is the lesson that I would draw from Sweden and other Scandinavian countries after the collapse of the USSR; Germany after re-unification; and post 1970s UK. It is arguable that all of these have succeeded but they have all taken very different routes.

        And that is without the Game Theory problems of all the economic actors beginning to believe that they can act ‘irresponsibly’ because they will always be borne out.

        [As a labour market economist of a certain age I am drawn to the German objective of macroeconomic stability (as is the Jobs Study reassessment) as the downside of the policies of activism being ‘wrong’ or – much more likely – mistimed (inflation and recessions) tend to have their most damaging effects on the worst off people in society.

        [However, it seems to me that my view tends to be more intransigent than the British economy and people can stand as falling out of the ERM; and the moving away from ‘boring’ monetary policy which just focuses on inflation seems to show.]

  3. Nanikore says:

    I have not read Acemoglu. But reading this it seems that either they, or you, have done a little bit of Political Science 101. Good to see.

  4. l8in says:

    Reblogged this on L8in.

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