Home / INTERVIEWS / On political economy, experimental economics and the future of Europe: in conversation with Yanis Varoufakis

On political economy, experimental economics and the future of Europe: in conversation with Yanis Varoufakis




You are a self-declared Marxist, yet your interpretation of economics is influenced also by contradicting views from other economists, Keynes, for example. How do you conciliate the eclectic theoretical influences that you rely on?

The influences aren’t necessarily contradictory, but dialectic. Economics should be capable of synthetizing our views through this clash between different schools of thought.

I call myself a Marxist because I believe that in a capitalistic system the markets for money and for labour don’t operate like other markets, they are contested terrains, where standard neoclassical theory is irrelevant.  

In this sense, I see capitalism as the process of generating contradictions, as it created both immense wealth and untold poverty. Capitalism is a progressive force, which, nevertheless, has the seeds of its own defection embedded within it.

Yet I am an eclectic Marxist: I dig the Hayekian view of the market as a mechanism for coordinating activities through prices, I also dig the Keynesian view that capitalism is perfectly capable of not experiencing a redemptive crisis. Put these things together, add a bit of Schumpeter and the creative destruction theory, and you have my view of the economic world.

Eclecticism is not something that is covered by the standard economics curriculum at university. Do you think there should be a fundamental change in how economics is taught?

Absolutely. Economics is taught in a way that is designed to put students off. Economics must be returned to a mode of teaching similar to philosophy, as the clash of narratives, yet textbooks are written as if they were physics manuals.

And do you think political economy is, to an extent, an answer to that?

Yes, fully. Political economy is the study of different conceptions and models of capitalism, which students should learn to synthesise critically, realising none is correct.

The deep incongruity in the heart of every economic model is that one can have either complexity, or growth, or time. General equilibrium has no time and has lots of complexity, dynamic macroeconomics has Robinson Crusoe models – they have one person, one quantity, no complexity – but evolve through time. Similarly, Das Kapital has Volume I, which has a very nice dynamic analysis but a cyclical model of the world, then in Volume III the whole thing goes pear-shaped.

But this is the beauty of it: if we could have had the perfect economic then we wouldn’t need a ministry of finance and democratically elected politicians running the economy, we could simply appoint experts who manage the economy like an architect using a piece of software to construct a building.

Democracy would be terrible there: if we all voted on how to build the building then we will have only collapsed buildings. So that’s where Plato was right: democracy is unnecessary when you have experts. But when it comes to economics, because of this mathematical impossibility, opinions matter.

And political economy should be all about allowing students to understand the limits of every model and then to develop their own opinions.

You previously did work at Valve as an economist. Can in-game, in-world economies be used testing grounds for economic theories?

Of course. There is a lot you can learn from those economies about price formation, convergence, multiple equilibria, bubbles, and the probability of a bubble bursting.

It’s the economists dream to have access to one of those multiplayer economies. I was studying an economy of about 80mln people, the volume of the transactions was 1.3bln a year, and it was all real time. In that position, the economist is omniscient. I didn’t need statistics: I had every single transaction in real time that had ever taken place, all the prices and all the quantities and the capacity to interfere.

For example, I was having a disagreement with a colleague from the University of California, Dan Freedman, a behavioural economist. At some point he said he didn’t believe in altruism, which he considered a form of sophisticated selfishness. He didn’t believe there was any possibility that people will random acts of kindness when they are completely unseen, if no one acknowledge the action. So I went to one of the developers and I told him to intervene in the code and offer players the opportunity, using real money to buy a gift and disperse them at random, so that they would never know who received it, and the recipient would never know whom they were from. In half an hour, $1.3mln was spent on random gifts.

These sorts of experiments are also completely different from experiences in universities labs, where it takes a year to get ethical clearance a year and a half to get the money, and another year to set it up. In these sort of in-game experiments, one can just ask the developer to make some changes and that’s it, done. What’s more, the sums involved are huge, and its’ real money, it doesn’t come from the research fund.

So we talked about real money, but how about bitcoin? Do you think there’s hope for alternative cryptocurrencies based on existing block-chain technology?

The block-chain technology we utilise in digitalised money is not that new: it’s already been used in the banking world, not so much for money but for clearing systems. All sorts of banks are investing in this sort of asset, because they have the public ledger. And the block-chain is fantastic. When it first came out I gave an interview saying I am not convinced that this is an alternative monetary system. I think it is a great answer to the questions that we have not discovered yet. And now I think we are coming up with all sorts of fantasies about what that might be.

Well you have come up with some interesting applications yourself, future tax, coin or FT-coins. Do you want to explain the concept briefly and then maybe explain how it has developed since 2014?

The idea came to me in the context of the Eurozone because governments are very significantly constrained in terms of liquidity.  The European Central Bank is not capable to provide the liquidity that countries need in times of difficulties. At the same time countries can’t even seek liquidity from the bond markets or the t-bills markets because of fiscal stress.

I started to think of ways of increasing the degrees of freedom that a country can have within the Eurozone. Our governments usually follow in arrears in relations to payments to tax returns, to firms and citizens: in Greece we had at some point a back log arrears of about 67 months.

So I thought: what if you can create a reserve account per tax-file number and type the money in there, and then give taxpayers a pin number and allow them to make payments using that system? And of course it works in reverse: taxpayers can use this system to pay the state for taxes they owe the state. This is a multilateral tax-extinction mechanism. The state can use this funds in the future to extinguish the individual’s taxes, and offer a discount on future taxes, while benefitting from the liquidity. This way, the state can borrow money from citizens, bypassing banks and bypassing bond markets. Peer-to-state lending.

This can be dangerous, however, because at some point the tax state of the government will collapse because of all these tax credits being cashed at a discount. Yet by using block-chain, then the economy would have a public ledger and citizens could monitor how many of these tax credits the government produces. In this way, the government could credibly commit not to produce more than certain percentage of its budget every year in those tax credits.

What are the advantages of a cashless economy and is it feasible in the context of Greece’s recovery?

Yes, interestingly, by exploiting the consequences of the capital controls and bank closures that were imposed on Greece. The number of Greeks that now have debit cards has skyrocketed, because they realised how valuable would debit cards be when banks were being shut. Unfortunately, I found out only in June, in the midst of the crisis, that 85% of pensioners did not own a debit card, because they are very conservative and suspicious of ATMs and “plastic” money.  

Because of episodes like these, drastically reducing the cash circulating in an economy is easy to implement. In this case, everyone would have a debit card, and all points of sales have machines where people log in, or can process mobile banking operation.

But beyond this, going cashless can help solving Greece’s serious problems of tax evasion, and prevent all sorts of transactions to be conducted under the table, in cash.

Draghi has recently applied negative interest rates to commercial banks’ deposits in the European Central Bank. Do you think the ECB would have the necessary instruments if another crisis struck?

Well, quantitative easing. But they should do it differently.

How so?

In my opinion, QE should not be about purchasing bonds, private or public, and mortgages. That only results in higher house and share prices. Ideally, the central bank should be able to “buy stuff”, but since it can’t Eurozone members should have a development bank, which issues bonds, with the Central Bank standing by to purchase those bonds, and by doing so turning excessive savings into investments – which can satisfy private demand. Then, why can’t there be a development that issues paper assets and gives it to the central bank, which covers them?

So do you think an approach similar to the metaphorical “helicopter money” would be useful?

Well, helicopter money is what I was referring to, in terms of the central bank “buying stuff”. In Australia, in 2008 the government cut taxes by $10,000 to all citizens to avoid recession, and the money was provided by the Reserve Bank of Australia.

You will soon be launching DIEM25: what are your hopes for that? You want to summarise what this project is?

Since the Greek bailout, supporters, friends and colleagues have been asking me to create a new party or movement in Greece that could challenge the failed policies.

But I am doubtful. I do not want to raise expectations again and not be able to fulfil them, because even the Prime Minister is not free to implement policies that are necessary to bring the country out of the recession and achieve prosperity. The finance ministers of major European nations are completely powerless.

Europe is undergoing a collective, systemic crisis, therefore there needs to be a common approach. National parties cannot implement their agenda or promise credible achievements. We need to come together as Europeans address our common problems; not just economic issue, but also migration, geopolitical issues, foreign policy, and terrorism.

The point of DIEM is to address these issues against the deep contempt for democratic processes of Brussels. We come together, we have a conversation of political consensus and that consensus finds electoral expression in different nations. That’s the idea. It’s utopian, but it might be the only alternative to a terrible dystopia.

So, whilst despising the status quo of democracy on the European level, would you consider yourself a Euro federalist?

Yes. We have no choice. Either we are going towards a democratic federation, or the European Union will fragment and it will disintegrate into its constituent parts, which are incapable of fulfilling the expectations of the various people in Europe.

So you are very much for Britain staying in the EU.

Yes. I think Britain can opt out from the European Union Council, but given that the country is committed to being part of the single market, you will have to play by the rules decided by the EU. That’s why I like to quote Hotel California: you can check out, but never leave.

It will also be a major mistake to think that there are two options: one is to accept Europe as it is, and the other is to get out. Britain cannot accept Europe as it is because it is hideous, and it is crumbling. If it is allowed to stay as it is, it won’t be there for long.

The only option is to bring back democracy in the EU from within, but first, it is crucial to sterilise the various crises of Europe, in order to create the circumstances for a European assembly to define the kind of institutions and constitution that we need.

Do you think the British public, whether they want to leave the EU or not, is justified to oppose the Ever Closer Union project?

I think that the resistance to an Ever Closer Union is justified, because this notion suggests that the recent process of European integration will continue on the same path. Yet the last decades of the EU were a disaster: the EU institutions don’t need more power, they need a complete change. Instead of focussing on an Ever Closer Union, we should start rethinking what the European Union should be like.

In 2005, you travelled with your wife to conflict areas and you produced a political-economic account of these conflicts. Did you see any common trends in these areas?

Absolutely. I was struck by the commonality of the experience of the divisions in all those different places. The people that live next to the peace walls in Belfast, are much closer in experience to the Palestinians and Israeli living next to the separation wall in Palestine and to the people that live next to the Green Line in Cyprus than they are to London or to Dublin. I remember I was in Belfast, and I was walking down these walls, and our next stop after Belfast was Jerusalem. And on one of the peace walls there was a mural of the wall in Jerusalem. When I was in Palestine, looking at walls in the warzone, our next stop was Kashmiri and there was a graffiti expressing solidarity for the people of Kashmiri. It was like a trade. So then an idea came to me, and my wife turned it into a video, “The Globalising Wall”, a wall that represents the other side of financial and trade globalisation, a wall that divides people.  

Do you have any regrets since last year?

Plenty. The main regret – there are many others – is that I didn’t get a chance to prepare it better, because I was thrust in it with a few days before the election. I wish I had had four years in position to prepare. But of course you can’t rewrite history. Another regret is that when I signed the Euro agreement on the 10th of February – and I still think that the text was fine – I had assumed that the other side would honour our agreement and would not violate its period and terms. I was wrong.  



is a Greek economist who served as Finance Minister during the debt crisis. In addition to his work for the Greek government, Yanis was Chief Economist at Valve, and held several academic positions as a lecturer in Economics at the University of Athens, the University of Sydney, University of East Anglia and University of Essex.


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