Varoufakis, 'Inherent Error' & Economic Indeterminacy

Is it better to build boats or deal in bonds? Obviously, other things being equal, it is better to deal in bonds. Building boats uses up scarce resources. It may lead to deforestation and the collapse of fragile eco-systems. Dealing in bonds, on the other hand, has no carbon footprint. It may improve the allocation of resources- preventing stupid boat builders from getting the right to chop down needful trees so as to make a nuisance of themselves hammering and sawing away at yet another useless boat.

Furthermore, dealing in bonds has a civilising effect. The Vikings were good at building boats but this did not render them virtuous or their visits a welcome event. By contrast, sophisticated financial markets require the rule of law and thrive most where the arts and sciences blossom. A really good boat builder will be able to raise money to build his dream boat in a financial centre of this description provided there is a genuine need, or effective demand, for such boats.

Varoufakis disagrees. He quotes Aristotle to confirm his prejudice that boat building is virtuous even though it is obvious to even the meanest intelligence that boat building is a fucking nuisance. How would you like it if your neighbour started cutting down trees and building a boat in his back yard? Does every yahoo have to have a boat? Enough with the boats already! Get a proper job and pay your taxes you stupid redneck.

Why is Varoufakis so hung up on Aristotle? The answer is that he thinks the Stagirite had a theory of value. Since Economics has a theory of value and since Varoufakis has a grouch against his profession, it follows that Aristotle's Nicomachean Ethics has something to say about the 2008 crisis.
What precisely? Let us see-

First, it (Aristotle's conclusion that Money was purely conventional and that something else- perhaps 'need'- underlay specialisation and exchange) highlights an Inherent Error that subsequent developments in economic theory have never really managed to eradicate; the conviction that a consistent theory of value may be derived from primitive data on humanity’s steady movement towards some telos: human need, preference, social affluence, etc.

A conviction can't be an error, inherent or otherwise. It is wholly normative. Errors are 'hamartia'- a falling short of the mark. This is alethic, not normative at all.

Second, it reminds us of how a truth may get lost as economic thinking ‘progresses; of how the fact that his theory of value held little water, and was thus discarded by the Northern European political economists once market societies started taking shape (some time in the eighteenth century), and led to the discarding of an important truth about the difference between virtuous economic activities (e.g. building a boat) and activities which could only be mistaken as virtuous (e.g. profit seeking); a truth that would be laughed out of court in the great business schools of our day, where hordes of young MBA graduates are being trained to think that the games they play, and whose only recognised telos is the ‘bottom line’, equip them to run anything, from a bank or a car manufacturer to a university or a hospital.

What truth got lost? That boat building is virtuous? That isn't a truth. It is a stupid lie. As for 'profit seeking', what is so evil about it? The butcher in the Vyadha Gita is a profit seeker. He is also perfectly virtuous. Lord Buddha saw no harm in commercial enterprise. Neither did Prophet Muhammad. So what if Aristotle was quoted as saying something different by European shitheads? Other Europeans did not listen to those shitheads.

What's so wrong with getting an MBA after you've worked for a few years in an industry so as to signal your readiness to manage an enterprise? If the owners of a firm in another industry think you have some special skill to run their firm, what great hubris are you guilty of if you take the job?

What is Varoufakis saying here? Is it that young people should never think they are equipped to run anything? That they should simply go away and build boats regardless of whether there is any need for more boats? Is that the 'inherent error' Varoufakis diagnoses in the human condition?

Varoufakis believes that there were no surpluses before 'socialised production' of the agricultural variety. This is foolish. Trade occurred in the Stone Age and hunter-gatherers have never had any difficulty trading with agriculturists or pastoralists or mariners or whatever.

Bureaucracies and Armies and so on can exist even if every household is autarkic with respect to  necessities.

It is nice to pretend that the 1 per cent stole our 'surpluses' and thus should come immediately to our homes to wipe our bottoms for us. But it is pretence merely. The child molester pretends that little kids are just dying to be raped by him. Such pretence is not virtuous. It is vicious.

As is trying to pass this lazy shite off as reasoned analysis-

Accompanied by the development of writing and bureaucracies, the practices of the community yielded a collective ideology essential to the coordination of the diverse activities necessary for surplus production.

If x is essential for y, then x must pre-exist y. The collective ideology must come first. It can't be 'yielded by' the practices of the community whether or not accompanied by the development of writing or arithmetic or the internet.

People who don't share a language or culture or a religion have nevertheless, throughout history, been able to gravitate to Schelling focal solutions to co-ordination games. The Scandinavians have a different ideology from the Saudis. This is no obstacle to mutual trade or entrepreneurial activity. There has never been any difficulty in a country with a Balance of Trade surplus financing a country with a different ideology's deficit.

Ideology thus emerged as the glue of society that kept socialised production going, minimised the conflicts involved in the distribution of the surplus, underpinned the community’s shared myths and fashioned its philosophical outlook.

Nonsense! People may have very different ideologies while being glued together in the same society. Furthermore, the fact that two capitalists share the same ideology doesn't mean there is any ideological way to resolve a conflict between them regarding how to divide up profits.

It was not long before these new ideologies crystallised into written laws, complete with the state authority to enforce them. Social strata which gained conventional control over scarce land soon acquired conventional (and later formal) control over others’ productive efforts. The power to appropriate segments of the socially produced surplus became inextricably linked to the new legal framework that enabled some to claim property rights over land, equipment, technological innovation, animals and even people. It was in this manner that earlier forms of hierarchies and social stratification yielded social classes.

Nonsense! Endogamy can by itself create castes whose habitus determines class order within a non-coercive system of exchange.

Perhaps, the most intriguing feature of our species’ social history is the relatively low-key role that explicit violence played within surplus-producing communities.

Rubbish! The certainty of explicit, overwhelming and unbridled violent retribution for an illegitimate appropriation is a feature of stable surplus-producing communities.  That's why young people who wanted to rape and rob and kill others to their heart's content had to leave their homes and go join ISIS. If they'd tried the same tactics in Paris or London or even Athens, they would have quickly been forcibly incarcerated. Even in Syria or Iraq they were not safe from bombing and drone strikes and so forth.
Violence, if certain, does not need to manifest itself explicitly though, at the margin, it does so in a frightening enough fashion.

The dominant social classes hardly ever relied on brute force in order to maintain their command over the larger portions of the surplus.

Sheer lunacy! The dominant social class in the Democratic Republic of Korea relies on brute force which is why it continues to command a larger portion of the surplus than that enjoyed by its counterpart in the other Korea. It is a different matter that they still get less in absolute terms. But, that's the problem with having a 'dominant social class' which actually believes in an ideology and uses coercive power rather than non-coercive exchange to coordinate economic acitivity. It is where no class is dominant in the latter sense that growth takes off.

Although violence was intermittently utilised in order to shore up their authority, the dominant class only used it when its power was on the wane. Indeed, the power of rulers to compel others (to do what was in the rulers’ own interest); the power to appropriate (or ‘privatise’) a disproportionate part of the collectively produced surplus; the authority to set the agenda; these are not forms of might that can be maintained for long on the basis of brute force. The French thinker Condorcet put this point nicely at a time of another great convulsion of history, back in 1794, when he suggested that ‘force cannot, like opinion, endure for long unless the tyrant extends his empire far enough afield to hide from the people, whom he divides and rules, the secret that real power lies not with the oppressors but with the oppressed’.

Condorcet's secret was that he was as stupid as shit. He should have run away in 1792, rather than stick around to talk bollocks. Subsequent events showed that no 'real power' lies with the oppressed unless they turn into oppressors for some reason.

Dynamic societies built their success on two production processes unfolding in parallel: manufacturing surplus and manufacturing consent regarding its distribution.
The ‘mind forg’d manacles’, as William Blake called them, are as real as the hand
forged ones.

If Varoufakis is right, then when an MNC shifts a plant from Texas to Bangladesh what then happens is that Bangladeshi Muslim women's consent is manufactured at the same time as their 'surplus value' is extracted in the factory where they work.

How does this happen? Does the MNC employ Bengali speaking brain-washers? Or is it not rather the case that 'manufacturing consent' is just a meaningless meme?


In his 2014 book, 'Economic Indeterminacy',  Varoufakis writes with reference to Sonnenschein-Mantel-Debreu's 'anything goes' result & Sonnenschein & Gul 1988 paper,

The problem here is that economists knew that indeterminacy arose in real world economies because of the usual sources of market failure- information asymmetry, uncertainty, non-convexities and so forth. Determinacy could be restored by either assuming a single sector model or a representative agent theory. Any economy can have a coherent description as either single sector or representative agent after the fact. There can be a coherent Marxian 'Labour theory of Value', or a Neo-Classical theory of Capital but we won't know their respective artificially constructed numeraires till after the event. But there would be an infinite number of such descriptions and corresponding numeraires and it would be impossible to distinguish them from within the model. But, this doesn't really matter. Mechanism design can go ahead on the basis of a 'black box' Revelation Principle just as Engineering can go ahead on the basis of Physics even though indeterminacy of a concurrency type arises.

Indeterminacy is not a big problem for any type of economic theory because there is always some coherent description, featuring a synthetic numeraire discovered after the fact, such that it can claim to offer superior correlated equilibria or else achieve the same result via Muth rationality. Thus Economists of any description can be oracles and offer salvation. But, so can Astrologers. There is always some 'correct' way of interpreting horoscopes such that an astrologer could have been the needful oracle of the times.

Of course, if Knightian Uncertainty is a delusion- the world has a predetermined Laplacian trajectory because of the mysterious workings of an Occassionalist God- then Astrology could never have a 'correct' form unless God wished it. Nor could Economics- save by some operation of Grace. But then Physics too would be useless unless specifically commanded by the Lord.

On the other hand, if Life evolved on an uncertain fitness landscape, then both individual and Social choice will display Hannan consistency- regret minimization- and both coordination game based 'correlated equilbria' as well as discoordination based 'hedging' and 'arbitrage' would feature in a manner which channelises somethings while damming up others as capacitance diversity so robustness is maintained.

Varoufakis, however, isn't interested in the Darwinian world rational people are doomed to. He prefers adolescent Left Hegelian schwarmarei

What great insight does 'a grasp of the dialectical nature' of anything offer anybody? Did Engels make some great discovery in Physics? Did the Soviet Union or Mao's China produce a single scientific discovery on the basis of the nonsense taught under the rubric of Dialectical Materialism? Varoufakis's 'negation of the negation' that is the indeterminacy desirable in theories of choice under Knightian uncertainty turns out to be sheer nonsense. 'Irrepressibly free humans' do not become 'increasingly enslaved by their artefacts'. James Dyson is not being bossed around by his vacuum cleaners. Elon Musk is not being whipped into the cotton fields by his electric cars.

Keynes's 'animal spirits' refers to mimetic effects. The 'cunning of Reason' does not. Animal spirits don't drive down the rate of profit in a secular manner. Marx's version of the Hegelian 'Cunning of Reason' does. Animal spirits explains why volatility will swamp profit erosion via competition. It may be that there is some 'turbulent flow' based analysis which can rescue Marxism a la Anwar Shaikh. But similar work can rescue anything at all- including Astrology.

Greece may have received 'a collective punishment' in 2008. India did not. China did not. Why? They hadn't made a mistake of a particular type. Even in the West, no one really thought that the asset bubble arose because 'radical indeterminacy' had been tamed by 'rocket scientists' working for Merchant Banks. On the contrary, they thought those Merchant Banks had indulged in fraud and chicanery. There was a wider problem of incentive compatibility- poor mechanism design- and some show was made of tackling that problem to speed recovery. However, the real importance of 2008 was that it confronted boomers in Western democracies with a bitter truth. They would be poorer in their old age and their sons and daughters would be even worse off.

If labour input is 'irreducible to a well defined metric' Marx's theory of value is worthless. But, in that case, Capital can have no power over Labour at all. Horses can be used to pull carriages. We still speak of the 'horsepower' of an engine. The eskimos use dog-sleds and, I suppose, could have come up with a metric for 'dogpower'. Cats can't be used in a similar way. There can be no 'catpower' metric. Humans serve cats, they don't own them. I suppose one could devise a metric for some activity which satisfies a cat's funktionslust - e.g. catching mice- but it wouldn't be universalisable or context independent.

Economic theory does not have to have a theory of Value. That was a desiderata of the philosophers and pedants. There has been no new work on the theory of value since Debreu. Why? People quickly saw it was 'anything goes'. It had no meaning.

The same can be said for 'surpluses'. None would arise save as a hedge against Uncertainty,

Varoufakis, writing in 2014- i.e. before his entry into politics and calamitous mismanagement of the Greek Finance portfolio- speaks of the Economy as being like the drama of Shakespeare or Sophocles- i.e one where individuals, by reason of hamartia- a tragic flaw- come to self-knowledge only through intense suffering. Why? The protagonist in tragedy is not playing a co-ordination game. He is not interested in any 'invisible' or guiding hand but is motivated by thymos to court his own solitary doom. Tragedy is the ultimate dis-coordination game and points to ontological dysphoria, not uncertainty & its related indeterminacy, as grounding the human condition. Economists, as Varoufakis proved during his disastrous tenure as Greek Finance Minister, can inflict terrible suffering on their own people by reason of their overweening thymos and consequent hamartia. However, they themselves remain cheerful and unfazed. They are characters out of Aristophenes not Aeschylus.

Varoufakis wasn't John Wayne. He had a motor cycle and a leather jacket. So, he was a Rebel without a Cause. Quite an achievement for a middle aged man. Pity Greece had to pay the price of his midlife crisis.