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«Secretary General’s Speech Writing and Intelligence Outreach Unit Programme, 1 March 2013 COFFEE BETWEEN THE SECRETARY-GENERAL AND YANIS VAROUFAKIS ...»

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1 MARCH 2013



Bringing New Perspectives to the OECD

Secretary General’s Speech Writing and Intelligence Outreach Unit

Programme, 1 March 2013



Other participants: Gabriela Ramos, Chief of the Staff and OECD Sherpa;

Mario Lopez-Roldan, Head of the Secretary-General‟s Speech Writing and Intelligence Outreach Unit; Jorgen Elmeskov, Deputy Chief Economist; Adrian Blundell-Wignall, Deputy Director of Financial and Enterprise Affairs, Special Advisor to the Secretary-General on Financial Markets 11.30 – 13.00


Presentation by Yanis Varoufakis to OECD Staff on “There is no such thing as a Debt Crisis: The Euro Crisis, Asia's Woes and America's Dilemma in a Global Context” 15.00 – 16.30 The Coffees of the Secretary-General: Yanis Varoufakis Short Bio


Prof. Yanis Varoufakis is a Greek-Australian political economist. He was born in Athens in 1961 where he attended the Moraitis School before leaving to study in the UK in 1978.

He obtained a Bachelor‟s Degree in Mathematical Economics from the University of Essex in 1981; a Master‟s Degree in Mathematical Statistics from the University of Birmingham in 1982; and a PhD in Economics from the University of Essex in 1987.

Between 1982 and 1988 he taught Economics at the University of Essex, the University of East Anglia and the University of Cambridge. Between 1988 and 2000 he moved to Sydney where he taught Economics at the University of Sydney. During this time, he was also an economics fellow at the University of Glasgow and the Université Catholique de Louvain.

Since 2000 he has been teaching Political Economics at the National and Kapodistrian University of Athens and has been chiefly responsible for setting up the University‟s Doctoral Programme in Economics.

He is also a visiting Professor at the Lyndon B. Johnson Graduate School of Public Affairs at the University of Texas at Austin.

Between 2004 and 2007 Prof. Varoufakis served as economic adviser to George Papandreou, before he became Prime Minister of Greece. He is a recognised speaker and often appears as guest analyst for news media like the BBC, Sky News, Russia Today and Bloomberg TV among others. He has also published several books on economics, game theory, and the financial crisis.

Prof. Varoufakis is the co-founder (with his partner, the artist and photographer, Danae Stratou) of VitalSpace.org, a non-profit organisation aimed at promoting the role of artists in today‟s society through the organisation of art projects, research programs, conferences, and publications.

In June 2012 he joined the software company Valve as the firm‟s in-house economist.

Prof. Varoufakis blogs regularly on yanisvaroufakis.eu and on blogs.valvesoftware.com/economics

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“There is no such thing as a Debt Crisis:

The Euro Crisis, Asia's Woes and America's Dilemma in a Global Context” Full transcript1 It is a great honour to be here at the OECD. This is an Organisation which historically had a significant role in fashioning the kind of ideas on which I will be basing my talk today. A Greek economist speaking on the theme “There is no such thing as a debt crisis” sounds a little bit like a hanged man disputing the concept of rope, but if you bear with me I will try to convince you that I am not in the business of denial;

unlike the EU and my government.

I know that Greece, as well as other countries, have been twisting in the wind and hanging by the neck from the proverbial rope of debt. Nevertheless at the same time, allow me to say that I truly believe that the notion of a debt crisis is analytically unhelpful and discursively dangerous. It is detrimental to our society‟s chances of recovery and of shared prosperity. When I say there is no such thing as a debt crisis I do not mean that there cannot be a debt crisis; indeed in the so called third world in the 70s, 80s and 90s there was a major debt crisis which could be uniquely and legitimately described as such. What I am saying is that in our generation‟s 1929, which is of course what happened in 2008, we did not have the creation of what can be usefully termed as a debt crisis, at least in the west – in the EU, the US and in Japan. Instead, we had what I call the twin peaks crisis. We have a mountain of un-payable debts and banking losses, which is what provokes people to talk about the debt crisis. Behind that mountain there is a second peak, a mountain of idle savings of surpluses too frightened to be invested productively and in a manner that produces the income by which to repay the losses and the debts.

1 The original transcript of Yanis Varoufakis‟ presentation has undergone minor editing to ensure that the text published in this brochure is presented in a reader-friendly format.

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This has not happened, these mountains remain and the fact that one is not cancelling the other out is the real reason that wherever on the planet you scratch the surface, what you find underneath is either explicit crises or terrible angst; as in China for instance.

Why can‟t markets sort out this mess? Well we never really had a reason to believe that they could. As economists – I don‟t know how many of you here have been afflicted by that condition – we should be weary of the limits of our „science‟. We should understand that since Adam Smith, we have spectacularly failed to create logically coherent models which managed to account simultaneously for complexity and for time. We can have models of great complexity of multiple sectors and in general equilibrium, but with no time. And we can have models of Robinson Crusoe-like single sector economies, or Ricardian corn models, which evolve through time. But we cannot have complexity and time in the same model. We have been trying and I will go as far as to say that it is not just a hard task, but we have not managed to do it because it is an impossible task. It is impossible to combine complexity and time in an economic model without introducing hidden assumptions that defy basic rules of logic. An anecdote comes to mind, I remember many years ago Gérard Debreu was presenting a model of general equilibrium which he had famously invented with Kenneth Arrow. He was asked by a younger economist about the relevance of the model for taxation purposes. Debreu stated “my dear fellow, you are confusing that which is interesting with that which is useful. This is merely interesting.” The point is that whenever we talk about, and utilise in our models, Ricardian trade theory about comparative advantage, we tend as economists, because it is convenient, to ignore the fact that none of that holds in an environment where capital is mobile. Especially in areas of financialisation which has created hitherto unheard of linkages between real wage differentials, real estate bubbles, sovereign debt and exotic forms of synthesised debt. It is pure folly to imagine that these models hold.

In designing fiscal consolidation programmes after 2008 for example, the great and the good in various organisations, this one included, have assumed Ricardian equivalence. David Ricardo‟s equivalence was based on the corn model, on a single commodity world. We know that a world

The Coffees of the Secretary-General: Yanis Varoufakis

with many commodities does not behave like the corn model. „We‟re damned if we know‟, as Keynes might have said, whether Ricardian equivalence would hold up in such a world. We use Cobb-Douglas production functions in order to advise governments; in other words, we create a model of the world in which every country resembles an electricity generator with a well defined function linking inputs and outputs. Then we claim to be telling politicians that these pieces of advice are scientific – this is a complete and utter flight from reason, straight into the embrace of pure faith.

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We know that finance under capitalism is not epiphenomenal on the real economy, as our general equilibrium models assume. We know, for instance, that something tremendous happened in Britain in the 18th Century that ushered in capitalism. What happened was a sequence that took us from production to distribution and to financialisation. Back in feudal times, the peasants would work the land, when harvests were collected the sheriff would come in and claim a share for the landlord (distribution) and finally the landlord would sell part of his surplus into markets for money which he would then lend to underdeveloped financial markets. Therefore production, distribution and finance. The moment you have ex-peasants acting as entrepreneurs organising in the means of production, what you have is financialisation. This is because the entrepreneur has to borrow money, usually from the loan shark or from a landlord, in order to employ workers at given wage rates. This great reversal which constitutes the beginning of capitalism meant something very important: finance came first in the chain reaction that led to the unleashing of incredible productive capacities around the world which gave rise to the growth of the last three centuries. Finance was central to that process, it was not something that was added to the general equilibrium models assuming that it made no difference to the real economy. The role of the financier in that world, in capitalism, is instrumental because the entrepreneur uses finance as a means to stretch an arm through the timeline into the future, to grab a piece of value from the future which has not been created yet, bring it to the present and put it into work so as to produce and generate the value that will happen in the future. Therefore, capitalism involves a recycling of present and future value through finance. The more that succeeds the more value and profit is created and suddenly there is a tendency of the financier

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As long as there are disparities between different regions or countries in that fixed currency world; and as long as there are disparities in the degree of capital utilisation, in oligopoly power, in the development of the capital goods sector as opposed to the consumption goods sector, there will be huge flows of capital flowing from the surplus to the deficit countries. These will not be helping the deficit countries to catch up in terms of productivity enhancement. Instead, they will be driving asset prices up and creating the circumstances for a crash like that of 1929. When the crash happens, as in 1929 and 2008, the immediate repercussion is firstly the fixed exchange rate system begins to unravel as it did with Britain leaving the Gold Standard in 1931; and as the Euro zone is unravelling, despite the best efforts of Mr Draghi today. The second repercussion is Nazis in Parliament, as we now have in Greece.

The new dealers were painfully aware of these facts as the world was exiting the Second World War. This is why we had the golden era of capitalism between the late 1940s and 1971 under the Bretton Woods system, which I prefer to refer to as the „global plan‟, because there was a lot more to it than just the Bretton Woods system. There was also the Marshall Plan, to which this Organisation owes its very existence, and various other programmes, some of them completely and utterly informal. The new dealers understood that you do need fixed exchange rates or predictable exchange rates to facilitate trade, such as the Gold Standard. But to leave it at that, without a surplus recycling mechanism, means that you are creating the circumstances for a massive depression. And they were very keen to ensure that they would recreate a Gold Standard-like fixed exchange rate regime with a surplus recycling mechanism implanted in the core. They disagreed with one another as to how this would be instituted. The British in 1944, through their representative Keynes at Bretton Woods, were proposing, as a fading power, a multilateral UN-like international clearing union that would collectively organise the surplus

The Coffees of the Secretary-General: Yanis Varoufakis

recycling. The Americans, represented through Harry White, had a different view, they said “It is our surplus, we‟ll recycle it anyway we like”. Therefore between 1948 and 1968 around 70% of American profits were recycled into Germany, into Europe and crucially into Japan. It was not a case of philanthropy; it was a case of pragmatism and an attempt to prevent the collapse that we had in 1929 rearing its ugly head again. The result was a period of convergence and a period during which the hegemon was losing out in relative terms if you compare and contrast the growth rates of the US to that of Japan or Germany. The US was losing but it was managing, nevertheless, through this recycling mechanism to ensure that at least for 20 years American factories were provided with the aggregate demand that was necessary in order to keep them growing after the war.

That golden era was always going to come to an end, it was predicated upon the idea of surplus recycling when the surplus was American and the recycling was orchestrated by the Americans.

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