Introducing Yanis Varoufakis

In the wake of the remarkable electoral victory by Syriza in Greece, the expectation is that Yanis Varoufakis will be the new finance minister.  It is difficult to overstate how important his work will be to the Syriza program: just about everything hinges on the sort of arrangement he can work out with his counterparts in the other eurozone countries.

His name may be new to most observers, even some economists who have just tuned into the Greek drama, but he has been a significant voice in economic debate for many years.  He can speak for himself, of course, and does so quite well, but here I’d like to situate him—how his intellectual background put him in the role he occupies today.

Varoufakis began his economic work as a game theorist.  He first came to my attention when I read his wonderful Game Theory: A Critical Introduction, coauthored with Shaun Hargreaves-Heap.  (It’s not really a textbook for beginners, but develops a trenchant critique at a foundational level.)  Over time, however, Varoufakis drifted away from game theory and moved into macroeconomics and political economy.

To be precise, Varoufakis is a practitioner of International Political Economy (IPE).  This is a diverse field with many intellectual traditions, but the particular strand he relates to takes as its starting point the observation that the current account surplus or deficit positions of countries are not randomly distributed attributes, flipping stochastically from one year to the next, but semi-fixed conditions.  From there the questions revolve around such topics as, why do countries end up in one status or another, what are the macroeconomic forces specific to surplus and deficit countries, how does surplus/deficit status affect the international objectives of governments and their power to achieve them, and what are the consequences of the international economic regimes that result from these political forces?  Researchers in this tradition range from the relatively centrist to the relatively left wing; there is, to my knowledge, no right wing flavor of this corner of IPE.  (Perhaps this is because Keynes is an indispensable point of departure for everyone who works in this field.)  Some names that carry weight in different circles: Barry Eichengreen, Jeff Frieden, Eric Helleiner, Michael Pettis.  (You can get an uncredited introduction to IPE in my macroeconomics textbook, incidentally.  I felt there was enough overlap between open economy macro and IPE, and enough need to consider them in tandem, to integrate them even at an introductory level.)

Varoufakis responded to the 2008 crisis by steeping himself in this literature and then contributing to it.  His book The Global Minotaur: America, the True Origins of the Financial Crisis and the Future of the World Economy, which appeared in 2011, provides an excellent overview of the IPE perspective and links it to themes in left wing economics and politics.  Thus he discusses how the fragility of global financial recycling is a product of but also influences the global order dominated by the US, modern class formation and its expression in domestic political structures, and the  burgeoning inequality of income and wealth.  Framed in this way, the problems we face can’t be solved by technical fixes alone; they demand a revitalization and extension of democracy.  Although it expresses his own views and was not written, as far as I know, in consultation with anyone else, I think the book is consistent with the sort of program Syriza is hoping to implement in Greece and promote in Europe.  You could read it if you want to dig beneath the headlines.  Varoufakis has also maintained an informative blog—strongly recommended.

The job Varoufakis is taking on is truly daunting.  When he walks into a room with other finance ministers, he will probably be the most advanced in terms of academic and intellectual preparation.  But international economic negotiations are governed by political calculation, not rules of empirical evidence or formal modeling.  To take a grandiose analogy, Harry Dexter White was no Keynes, but the text of Bretton Woods has a lot more White than Keynes.  It may turn out that Varoufakis’ earlier work in game theory, like Rational Conflict (1991), will be more relevant to his forthcoming day (and night) job than all the wisdom he’s accumulated in international economics and finance.