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Inequilibrium: Greece, Germany and Social Science

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BY TOMMASO PENNA 8/10/2015

The recent Greek debt crisis has sparked media attention and raised questions over the distribution of power within the European Union and the long-run viability of the European project. The Greek coalition government, led by Syriza’s Alexis Tsipras, was elected in January on a pledge to end austerity measures that had largely come to be perceived as an oppressive obstacle both to the welfare of the Greek people and to prospective recovery. Greece’s international creditors, on the other hand, have held firmly to principles of financial discipline and have once again managed to impose a heavy set of supply-side structural reforms as a condition for the granting of a third bailout loan. This was achieved in despite of significant domestic political opposition (at parliamentary level) in both Greece and Germany, thus forestalling a default and a probable ‘Grexit’. The negotiations have highlighted the absolute dominance over EU politics of one country, Germany, whose Chancellor, Angela Merkel, and Finance Minister, Wolfgang Schäuble, to an increasing degree, hold the keys to power within the European Union.  

“Mr. Schäuble cites his grandmother, “Benevolence comes before dissoluteness”, as a warning of the dangers of excessive ‘generosity’.”.

Of course, we all know the story. And of course, we have all read innumerable commentaries, by journalists, politicians, economists and public intellectuals of all sorts. I propose, instead, to take a step back to reflect on the lessons to be drawn from the dramatic events of the past few months for social science in its most fundamental theoretical terms. Following the Brussels negotiations, one cannot help asking whether it is possible to uphold a single satisfactory model of agency: as shown by the examples below, different standards were being used to justify policy plans. Clearly, such theoretical dilemmas are far from new and have been addressed in various forms across several decades. Recently, however, the bulk of some of the core assumptions (and in particular, that of unbounded rationality leading to prima facie equilibrium), that had been providing microfundational basis for macro-level theory, have been increasingly challenged (see, for example, Colander 1996). On the other hand, it has proved hard to incorporate elements such as multiple equilibria and complexity, or the analysis of non-price-coordinating-mechanisms, into policy designs. This is explained by the fact that traditional equilibrium assumptions are to a large extent interdependent, therefore a path-dependency effect has led economists to more conservatism in policy discussion than in theoretical scholarship (Colander 2003). But is this situation not highlighting a contributing cause to current national and supra-national policy failures? Rather than providing a definite answer, my aim is – somewhat more modestly – to show how recent real-life happenings exemplify quite clearly the importance of valid theoretical underpinnings in the study of economics.

 

In the past centuries, thinkers with so little in common as Mandeville and Marx denied that moral considerations should be given any weight in our attempts to understand the workings of the economy. Such contributions have been highly influential for the establishment of a scientific basis for the study of economics. On the other hand, Weber’s perhaps most famous intuition was that value-rational action, such as that guided by religious beliefs, had played a key part in the development of capitalism. One major influence on him was that of Nietzsche, who, in his Genealogy of Morals (II, 4) had observed how the German word for guilt (schuld) is etymologically connected to that for debt (schulden). Following such lines of thought, it is important to ask whether homo economicus can be analytically separated from other forms of subjectivity, such as homo moralis.

“Each country’s government is incentivised to play their role with an eye – or both eyes – on their own domestic political situation.”

Let us now return to current affairs. Are European economic policies influenced by predetermined ethical considerations? Many commentators (e.g. Soll 2015; Crook 2015) think along such lines: the conditions imposed under the latest bailout represent a German-led ‘punishment’ of the Greeks for failing to subscribe to the austerity diktat imposed on them. Quite independently from the merit of the economic arguments being made, it is possible to assess the Greece ‘problem’ through very diverse frameworks, of political, ideological, and even cultural nature. This is also suggested by the terms used by the main individual actors. For example, EU Commission President Jean-Claude Juncker’s talk of the ‘trust’ he chose to (had to?) place in Mr. Tsipras, which he is disappointed to see “not always returned in equal measure” (Juncker 2015). Similarly, Mr. Schäuble even cites his grandmother, “Benevolence comes before dissoluteness”, as a warning of the dangers of excessive ‘generosity’ (Schäuble 2015). It seems quite clear that an accurate analysis of the events could not but take into account substantive reasoning in a model capable of explaining them. Further, it is important to note that during a period of political crisis such as that presently experienced in the Eurozone, each country’s government is incentivised to play their role with an eye – or both eyes – on their own domestic political situation.

 

An important example of this is given by the case of Spain, which after implementing a programme of tough fiscal discipline in the past few years has achieved satisfactory recovery: the incumbent conservative government has since taken a consistently tough stance in opposing Greece’s demands, fearing the rise of anti-austerity movements, with elections due in autumn. Such examples, I believe, represent different sides to the more general problem of social embeddedness in the modelling of economic action (Granovetter 1985), which has been the key theoretical starting point for contemporary economic sociology: all social action is, to various degrees, ‘embedded’ in systems of social relations, which affect it to a non-trivial extent. Decisions such as those taken by the various governments over the debt crisis, in order to be explained, whether with descriptive or prescriptive aims, need to be understood through an interpretive lens, taking into account the most diverse rational standards; as Weber put it,

Something is not of itself ‘irrational’, but rather becomes so when examined from a specific ‘rational’ standpoint. Every religious person is ‘irrational’ for every irreligious person, and every hedonist likewise views every ascetic way of life as ‘irrational’ (quoted by Kalberg 1980: 1156).

“The great problem facing the EU project as a whole is the lack of a common perspective.”

Similarly, the Greek government’s demands for debt relief should not be judged of themselves ‘irrational’, but they undoubtedly become so from the point of view of those saying ‘surely they must repay what they have borrowed’. This is, in conclusion, the great problem facing the EU project as a whole: the lack of a common perspective from which to judge, democratically, which strategy would be best to pursue. The role of social science, then, lies in the elucidatory task of drawing a value-neutral picture of what the different values, interests and positions are, while, at the same time, acknowledging its own value-relevant role by admitting a bias in favour of the possibility for free normative confrontation among the different actors. This, importantly, includes decision-making on economic matters, perhaps the field that is furthest apart from democratic control in the context of our present predicament.

 

References

Colander, D (ed.) 1996. Post Walrasian Macroeconomics: Beyond the Dynamic Stochastic General     Equilibrium   Model. Cambridge: Cambridge University Press.

Colander, D. 2003. “Post Walrasian Macro Policy and the Economics of Muddling Through” International Journal of Political Economy 33 (2): 17-35.

Crook, C. 2015. Europe Wants to Punish Greece With Exit. July 1. http://www.bloombergview.com/articles/2015-07-01/europe-wants-to-punish-greece-with-exit.

Granovetter, M. 1985. “Economic Action and Social Structure: The Problem of Embeddedness.” American Journal of Sociology 91 (3): 481-510.

Juncker, J-C, interview by P Müller, M Sauga and C Schult. 2015. EU Commission Prsident Juncker: ‘I don’t Understand Tsipras’ (June 19). http://www.spiegel.de/international/europe/eu-commission-president-juncker-on-greece-and-tsipras-a-1039738.html.

Kalberg, S. 1980. “Max Weber’s Types of Rationality: Cornerstones for the Analysis of Rationalization Processes” American Journal of Sociology 85 (5): 1145-1179.

Schäuble, W, interview by K Brinkbäumer, M Sauga and C Reiermann. 2015. SPIEGEL Interview with Wolfgang Schäuble: ‘There Is No German Dominance’ (July 17). http://www.spiegel.de/international/germany/interview-with-german-finance-minister-wolfgang-schaeuble-a-1044233.html.

Soll, J. 2015. Germany’s Destructive Anger. July 15. http://www.nytimes.com/2015/07/15/opinion/germanys-destructive-anger.html?_r=1.

Tommaso Penna

is a third year BA Political Economy student at King’s College London.

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