Concerning Short Working Paper on Application of Game Theory in Political Economy And the Nash Equilibrium

One of the professors in the program have given me an idea of writing a short working paper on the application of game theory in political economy. If you didn't know, I was quite fond of political economy charts and typology charts in R^1 when I was a teenager. This included websites such as the Political Compass, the Nolan Chart and many others like it that are numerous in size and scope. What I want to do here is to rummage through the hordes of papers on this particular subject and write a very short working paper on the Application of Game Theory in Political Economy and how it pertains to the Nash Equilibrium.

In the meantime, I also just started a working paper on economics and public policy and how these are intertwined and how we can utilize powerful tools in both fields to further study income inequality. I'm not exactly sure what the narrow subjects I will focus on this particular working paper, but I will have a good idea as next year rolls around.

Greek Finance Minister, Game Theory and the Big Showdown

In an earlier and rather detailed blog post, I had talked about the Greek debt situation and the stories that surround it. I have decided to post another blog entry primarily about the game theory and the Greek financial minister, Yanis Varoufakis, especially due to his showdown with Germany and the developing crisis in the European Union. The news has just hit today that Germany has rejected the Greek proposal to extend the bailout program by an additional 6 months. The Syriza government had been under enormous pressure by both the European monetary authorities and the officials of various European financial ministries to continue the bailout program despite rejecting the program itself. This article will try to explain the background of the Greek Finance Minister, Yanis Varoufakis, in more detail, but also will go deeper into how his research interest in economics, Game Theory, has also come into play during the midst of this big showdown between the new leftist Syriza government and the European monetary authorities.

The Greek Finance Minister, Yanis Varoufakis, has now become very well-known within the politics of the continent due to his showdown with the European monetary authorities and his penchant for his plain dress combined with a defiant attitude towards what the Troika had committed to his native country of Greece, but also within the economic world with his unorthodox economic views. In two articles, one commentary article written by him in the Guardian newspaper several years back and another article on the left-liberal activist site, CounterPunch, it illustrates a man who is determined not to just change the policies of austerity and liberal capitalism in Greece, but throughout the entire European Union. In the first article, we can picture a man who was trained within the confines of mainstream economics, but had defined himself in 2012 as a Marxist. He did not describe himself as the prototypical Marxist, but one that is committed to changing the economic dimensions within Europe. In the article, he described the economics within the continent as one that is committed to the form of neoliberal capitalism, but his progressive politics of the left will be rejuvenated from the doldrums to saving European capitalism. From this article, we can see a man who is dedicated to the leftist ideology of changing Europe and the economics within the continent towards one that is certainly socialist both in policy and in application.

The second article describes Mr. Varoufakis' plans in detail about changing the dynamics of the European economic system into one that promotes growth and not austerity. The tone of the article also described how a previously unknown Greek economist had stared down the monetary bureaucrats of the European Union and sent some of them scared. It could be best said that Varoufakis had utilized some of his training as an economist, especially in the arts of game theory, to give what little the Greek government had previously into an enormous advantage over the people at the Eurogroup. For those, who are not familiar with Game theory, here's a short BBC article that explores the dimensions of the games (which include possible applications of zero-sum games and of the prisoner's dilemma) that Greece has been playing with the Troika, the Eurogroup and other European countries like Germany. He also has written an article in the New York Times on the big showdown with the European monetary authorities, which includes Germany and Angela Merkel. In the article, he lambasted how they "should not" be utilizing game theory with each other over the debt deal, but should be best focused on how to provide the average population a way out of desperate poverty and destitution. It does make a lot sense to anyone who has read his article, but Varoufakis has been utilizing all sorts of strategies that are based on game theory in dealing with the European monetary authorities! In an article by a popular Forbes contributor, Tim Worstall, there's absolute no room for game theory here! Regardless of whether most people have agreed with Greece's accession into the Eurozone or with the following policy decisions that the European monetary authorities have undertaken, Greece and the European Union are in trouble.

Exactly how much trouble are the European Union, Greece and the Eurozone in? A good question might be to ask about the other debt troubles that various European nations such as Spain, Italy, Portugal and even France have in the future. Germany is not even immortal with its enormous debt burden that it has also managed to start decreasing in the last couple of years, but another crisis could exacerbate the debt levels even in Germany which are already alarmingly high. I strongly disagree with a recent Economist article on how Greece could have made the Eurozone work better. Greece could not have made the Eurozone work better, as there are numerous other economies that are facing similar problems as Greece. I believe that with the Greek Finance Minister's dangerous moves may put the European Union and the Eurozone at its brink, but there is also ample room for finding a balance between the views of both Germany and Greece. By rejecting each other's counter-proposals, they are putting the world economy at risk with their latest proposals. Worried Greek depositors and international investors will now brace for the final showdown between Greece and the European monetary authorities. Let's hope we don't wake up to see an avoidable financial crisis.

Thoughts on this week's World Economic Forum in Davos

Like many around the world, I have been following this year's World Economic Forum in Davos, Switzerland. As I described in a previous blog post, lots of pressing issues are discussed among the leading policymakers from around the world. I mentioned the key points to this year's meeting and it includes many of the pressing issues that we as a world have to face today. Here is the link to the key moments that had happened during this year's World Economic Forum. From what I gather, this year is the year where a combination of low energy prices, terrorism, growing income inequality and a looming economic malaise surround the world at large. I believe the people at this particular conference talked about some of these pertinent issues and they have overall tackled some of the more pressing issues. These issues are very indeed alarming and I believe some of these issues can be tackled without the "action" that some of the conference attendees have come up with.

Thoughts on the key points of the yearly conference:

1. Reduce inequality, but to promote growth
The most pressing issue around the world is the growing inequality that has been prominent in world headlines and in numerous discussions between economists. As Thomas Piketty's book has reached its popularity around the world, numerous other economists and many politicians around the world has mentioned that this was a huge issue that needed to be tackled. There have been tremendous amounts of press coverage in the last couple of years towards this particular subject and the people at the forum have talked about various ways to tackle this pressing issue. Sustainable growth is something that the people at the forum have talked about as a possible resolution to the most critical issue presented at this particular conference. I believe that while it is possible to reduce inequality through promoting growth, it is also important to consider other possible solutions such as structural reform of key institutions and of how certain private institutions could function within the confines of society. It's interesting to note that while some solutions are offered, I believe there should be more radical solutions such as that posited by Piketty's Capital in the Twenty First Century than the more conservative ones mentioned at the forum.

Here are a couple of video links to certain conversations at the forum that concern this particular problematic issue and other related issues: The World Economic Outlook, IMF Director Christine Lagarde's Address, Issue Briefing: Income Inequality, BBC World Debate.


2. Europe's Quantitative Easing program
As announced in a previous post, the European Central Bank has announced a new massive quantitative easing program of over a trillion that will be pumped into the European economy. There has been a lot of discussion over this particular policy decision by the panel discussants at the forum, by top economists such as Robert J. Shiller, by the top bloggers and with some of my friends. As mentioned in a previous blog posts, there has been a tremendous controversy over this particular issue, with numerous speakers giving their particular opinion on the particular issue. Here's a list of quotes by key forum speakers and here's a video on the discussion of the effects of quantitative easing in the United States and beyond. Here are two contrasting opinion articles on the effects of quantitative easing, one from Professor Jeffrey Sachs and another from Stephen S. Roach. With this particular problem that has already been implemented by Mario Draghi, I believe it is important for them to promote these particular policies, even though there might be strong negative consequences that come from this round of quantitative easing, such as a combination of weak growth and of higher inflation that might come from this monetary policy, but we will have to wait and see.


3. Energy Prices
I think the recent drop in energy prices have been affecting everyone domestically here in the United States and globally around the world. Energy consumers have been given a break in the recent drop in petroleum prices, but energy producers have hit a wall. Countries such as Russia, Iran, Iraq, Venezuela and others will suffer tremendously in the coming years, which might contribute to significant political instability. I mentioned in an earlier blog post about Russia's internal and external problems, which I think will compound in the coming years. This will see a surge in Russia's more aggressive and nationalistic foreign policy. The oil producers will see significant domestic problems, which were already tremendous in volume, expand rapidly throughout the Middle East. We could see trouble in the coming years with this drop in oil prices because it cause an acute global recession.

Here's a video of an interesting panel discussion during the conference that concerned energy.

4. Market Volatility
The last important point that the people at the forum have made concerned with the issue of market volatility. The markets have been very volatile over the years since the Great Recession with the recent drop in energy prices and the global stock market rallies been at the forefront of discussion.

Here are a couple of discussions that deal with this pressing issue: Volatility as the New Normal, The New Growth Context.

Other Important Points:

1. China
A couple of key panel discussants talked about China at this year's conference, which included the Chinese Premier, Li Keqiang. As mentioned in a previous paragraph, he was one of the first to talk about the income inequality issue in an address to the Forum. China has tremendous challenges when it comes to its economy and its new role in the global economy, but I think it can be a tremendous benefit to the world to more fully incorporate a nation of China's size into the world economy. Here are two videos that address the issue of China in the world: Video of Premier Li Keqiang's Speech and China's Impact as a Global Investor.

2. Al Gore and Climate Change
There was a discussion by Al Gore and another discussion throughout the 4 day conference that concerned the topic of climate change. As many have watched Al Gore's documentary and other documentaries that have talked about the pressing issue of climate change, we can conclude that this is one of the more important topics talked among conference participants and conference followers. These two discussions presents the views of many that concerned this particular issue, with several others chiming in on the discussion. I think there are a tremendous number of economic issues that we will run into if we implement Al Gore's plan to combat climate change. I believe the biggest issue has to deal with the continued development of emerging economies and with the issue of lifting billions of individuals, while simultaneously counteracting this increase in carbon emissions and in pollution.

3. Conflict zones
There were a tremendous number of discussions that dealt with the increasing number of conflicts that have developed in the world, which include a variety of countries. This included actual military conflicts such as those in Syria, Ukraine and Iraq along with competing geopolitical games that larger powers are always conducting. The key discussion in this particular subject is that of the development of a new multi-polar world, which always had potentially dangerous consequences. This also leads us to the question of the viability of the democratic institutions, which has been the landmark of industrialized Western countries such as the United States. Is the end of history as describe by Francis Fukuyama not possible or is it a new chapter in history? We will have to wait and find out what unfolds in the coming years.

There were a lot of great panel discussions over the course of these 4 days in Davos. Despite the amount of content that was covered at this year's edition of the World Economic Forum, there are many economic (and political) issues that are still yet to be discussed. With the interesting economic and monetary situation unfolding in Europe and in Greece, we will have to wait and see what unravels.

Thoughts on the Thomas Piketty event

As I mentioned in my last post, I had the great pleasure of attending the Thomas Piketty event at this year's American Economic Association annual meeting. I have been reading his latest work, Capital in the Twenty First Century, which has been published to both great acclaim and great criticism. Ever since Thomas Piketty published the book, it has sent shockwaves through the current economic establishment with many rebuttal books written to in response to the ideas that Professor Piketty had presented. (The number of rebuttal books range from sort articles to large pamphlets, if you look at the Amazon website, you'll be able to find several) Within the confines of the academia and outside of it, there has been almost a numinous reception of his work. For the popularity within the outside world, it has created numerous tractable differentials in opinions, from those who love it and those who hate it. Some people have praised it and bought the book in record numbers. There have been many prominent economists who have published great books and papers, but I believe the response that Professor Piketty's book has had a ripple-like effect on the consciousness of the entire economic community. I personally enjoyed this book immensely, even though I don't necessarily agree with much of its content. In this article, I will try to dissect the 2 hour conference and throw in my thoughts about the event itself.

The Thomas Piketty event at the AEA meeting was an immense occasion where the room was packed to capacity, with perhaps about a hundred people extra standing at the sides to witness the presentation featuring other prominent economists such as Greg Mankiw. David Weill, Professor of Economics at Brown University, gave an approving observation and analysis of Thomas Piketty' ideas that were presented in Capital. Based Professor Weill's observations, we can see the wealth of knowledge that the 700+ page book has to offer for both economic researchers and wider audiences beyond. Professor Alan J. Auerbach and Dr. Kevin Hassett had different ideas when it came to Piketty's book. Despite their disagreements with much of Thomas Piketty's theories, they are very impressed by the depth of its analyses, but they feel like certain things about the book were perhaps too unrealistic in terms of its application, especially in tax reform and other related things.

Professor Greg Mankiw, Chair of Harvard University Department of Economics, gave the next lecture on his interpretation of the book and he then gave a thorough lambasting of Piketty's book. He labeled Piketty's book as resorting to the simple promotion of egalitarian policies that lead both of the rich and the poor to sink into destitution. This does not come as a surprise to many economists and voracious readers who knows about Professor Mankiw's defense of the top one percent in his recent article, Defending the One Percent, which was published in the Journal of Economic Perspectives. During this time, there were certain people that heckled Professor Mankiw, with loud cheers of approval on one side of the economic spectrum coupled with disapproving shrugs on the other side. Personally, I am impartial to the views of both conflicting sides as there is much to derive from the analyses on both viewpoints. What's interesting about Professor Mankiw's conclusion is that r>g is not the problem, but that r<g is the problem! This is a particular interesting observation as I believe that Thomas Piketty has the correct observation, but perhaps not the correct response to such taxing issues. (For those interested in a good opinion article that I had read last year, please refer to Tim Worstall's Forbes article.)The excitement in the room grew with the anticipation of Thomas Piketty's talk on the ideas that he had promoted in his book.

Professor Thomas Piketty, Chair of the Paris School of Economics, gave a simple explanation of his 700+ page book, which has reached the absolute apex of its acclaim. It has been on the front page of newspapers, best-selling book lists and other similar journals, with raising him into the public spotlight beyond what is normal for economists. In this presentation, Professor Piketty presented the basic theories in his book with a special focus on r>g in trying to resolve the huge issues that the world faces today. He talked about how its entirely applicable to the study of long-run wealth inequality versus labor income equality, which you cannot utilize r>g to solve. The other point that I derived from his work was the basic model that he had presented, with a strong focus on the reinforcement of more democratic institutions with the certain mechanisms surrounding income and wealth. He postulated that the serious problem of inequality should be tackled through a progressive wealth tax, escalating at each level, which is quite unrealistic in my mind.  I have yet to complete the many sections of the book, as I've only skimmed parts of it, but it'll be exciting to write my second thoughts on the book after going through each section in more detail.

Overall, this session was one of the most exhilarating sessions I've been to in Boston and I've been to a couple of very heated Israel-Palestine conferences. The session was followed by an extremely tense question and answer session, with a particular individual launching a fallacious tirade at both Professor Mankiw and Professor Piketty. I also had the privilege of speaking with Professor Thomas Piketty briefly after the event and I hope to have better questions prepared for him next time.