How Individual Rationality can cause Political Constraint that inhibit Financial Support

An Analysis looking at German Political and Domestic Discrepancies after the 2009 Sovereign Debt Crisis


Term Paper (Advanced seminar), 2013

33 Pages, Grade: 1,7


Excerpt

Table of Contents

1. Introduction

2. Rational Choice Theory
I. The Rational Choice Approach
1. Decision under Certainty
2. Decision under Uncertainty
3. Decision under Risk
II. Cooperation
1. Two-Person Cooperation
2. The Missing Piece – Repeat Play
3. External Enforcement
4. Interstate Cooperation – Principles and Facilitators
a. Mutuality of Interest
b. Shadow of the Future
c. Number of Players
III. The Domestic and the International Level
IV. Rational Choice and the Public
V. Groups, Cooperation, and the Problem of Free Riders
VI. A Short Subsumption – Areas of Conflict

3. The Sovereign Debt Crisis – A Case-Related Summary
I. Build-up in Greece
II. German Response

4. A Theory-Based Case Analysis
I. Level I – The International Level
1. Mutuality of Interest
2. Shadow of the Future
3. Monitoring and Punishment
II. Level II – Public Opinion
1. Opposition to Financial Support and its Origin
2. What Constitutes Public Opinion on the Crisis?
3. Germany and its Rational Approach to European Politics
4. An Adaptive Public and Wrong Communications – Reasons for Discrepancy

5. Conclusion

6. Bibliography

1. Introduction

Ever since the Financial Crisis 2007 and the following sovereign debt crisis in 2009, there has been an on-going debate about how it is possible to uphold the Monetary Union. It seems the fiscal union has lead to unanticipated political and economic interdependencies between member countries. These lead to an imbalance in the distribution of responsibilities, leading to an increase of polarizing attitudes towards further economical and political relations:

While Greece is blaming1 better situated, export-driven central European countries for their miserable economic situation and demands financial support, donor countries such as Germany have quite a different debate going on. The question if indebted countries should receive financial support after and how it is feasible to prevent further crises causes much controversy in politics as well as in public debate.

Especially Germany, a pivotal actor in the European monetary union and representing one of the leading donor nations,2 finds itself especially in an ambiguous situation. Although Germany historically supports the European cause fervently, now – after a decade of heavy reforms, severe austerity, and economic stagnation – there is great reluctance among the public to bear the consequences of – as perceived – others’ self-inflicted debt and mismanagement. In this respect, BBC News captioned in regards to the Cyprus bailout in 2013 that – confronted with hostile demonstrations in the receptor country – the German public feels aggrieved, as they “perceive their country as a generous donor of hard-earned cash to peoples who have let their finances go to ruin.”3

The fear to be the “paymaster of Europe”4 in spite of other nations own accountability and breach of EU contract are reasons why the German public opposes unconditional support of indebted countries. This fact constrains the very reluctant and divided German lower house extremely.

The aim of this paper is to analyse the reaction of Germany to the sovereign debt crisis and its policy stance using Rational Choice as an explanatory device. It is suggested, that a very rational approach is employed both by the government and the public. However, with the incisive need to support Greece to prevent an outspread of the crisis, the German government lost public support albeit acting rational in its national interest. This paper claims, that missing and wrong communication by the government caused a discrepancy that alienated the public from the national interpretation of the issue. The paper concludes with a recommendation on how the German government should deal with the Euro crisis domestically to tackle the pressing issue effectively.

Building upon Axelrod’s theory on interstate cooperation, there will be little difficulty to explain Germany’s approach to solve the crisis. When it became obvious, however, that Greece would need support or otherwise the crisis could likely spread across Europe, the German government found it hard to raise support for this unpopular policy. Looking into theory, Putnam may offer a good insight why German politics hold a stern position when it comes to financial support, which can be said to follow rational choice. This is true, even after it was more then apparent on a national level that support was necessary and indeed beneficial to German interest. Trying to connect Axelrod’s ideas with those of Putnam, it is likely that public opinion within Germany deprives the government of much needed leeway.

It is highly suggested that German domestic constraints on state sponsored aid for Greece heavily influence German politics, inhibiting decisive rational choices on the national level. Looking closer on the second level, it appears that the German public also derives its stance from a mostly rational interpretation of the sovereign debt crisis, giving not much heed to the European cause or symbolic traditions,5 but now inhibits rational decisions on the national level. As the public is susceptible to a rational approach to the issue, this discrepancy results from a communication problem.

This predominantly rational approach to the European monetary union by the German public seems to be part of a broader switch in ideology regarding European issues. Thus this paper closes with the recommendation that, if a change in dealing with the euro crisis is indeed wanted, the communication problem between the two entities needs to be resolved. It is firstly imperative to address the German public, and secondly, it is necessary to change the language from symbolic to a rational argument. Though this may not mend general reluctance and sentiments, it may be effective to silence open resentment such as the newly founded party “Alternative für Deutschland” or negative press.

2. Rational Choice Theory

I. The Rational Choice approach

At the core of Rational Choice theory is an actor who behaves purposive and rational at all times. Rational, according to Downs, means an actor is6

- always able and willing to choose between alternatives of action,
- evaluates the possible results of alternative actions (cost-benefit calculations) and ranks these (any outcomes can be ranked either a ≥ b or a ≤ b) accordingly
- his choices are transitive (if a ≥ b and b ≥ c, then a ≥ c) and he
- chooses the action that maximizes his utility
- comes to the same decision within identical situations.

In this sense rationality is highly instrumental. It needs to be considered though, that there are countless other alternative approaches to solve an issue as in reality people are less certain about their objectives, the environment, and their preferences, and so, they do not allow a simple mathematical – or better logical – approach.7 So in spite of all its shortcomings, this idealistic operationalization of rationality and Rational Choice is nonetheless the most fitting approximation.

Following this idealisation, when confronted with a problem, there are usually three possible situations an actor finds himself in:8

1. Decision under Certainty

The actor knows every consequence of all possible actions and is thus enabled to order all alternatives of action according to his preference. In the end, he simply has to choose the option that offers him the best cost-benefit ratio.

2. Decision under Uncertainty

If the outcomes of decisions are no longer certain they are probabilistic. Instead of dealing with simple outcomes [a1, a2, a3, … an], the actor has to deal with sets [(a1,p1), (a2,p2), (a3,p3), …, (an,pn)] where to each outcome a, there exists a probability p with. The actor is – thanks to the utility-function by von Neumann and Morgenstern – still able to calculate the utility value of each pair and identify his preference.

3. Decision under Risk

If, for example, the probabilities p for all outcomes a are completely or partially unknown, the actor is no longer able to determine a preferred ranking and choose his best interest. Although this situation is not tangible with pure (mathematical) Rational Choice, it is still possible to develop rational approaches or guessing strategies to solve such items. Although the least preferable, a situation where some of the information is missing is usually the most common in everyday life. On a side note, even if it were possible to calculate all the utility functions, it would most likely take too much time to do so. So while the formal mathematic approach is always kept in mind, it is often necessary to find quicker solving strategies to optimize results.

It should be noticed that Rational Choice is an actor-centred theory. Nonetheless, institutions are being accounted for. Especially the New Institutionalism – as postulated by March and Olson – exhibits a Rational Choice based model that uses institutions as structuring mechanisms for strategic behaviour.9 As this paper works with cooperation at an international level, it is imperative to account for institutions. The theories by Axelrod, Putnam, and Olson allow for a Rational Choice approach that includes institutions in the context of this analysis.

II. Cooperation

Probably the most standard problem of Rational Choice is as follows: one or several actors find themselves in a situation in which they need to identify their preferred alternative of action using cost-benefit calculations. There are various other scenarios, however, where such an approach is no longer applicable. Sometimes, there is more to be accounted for than simply outweighing costs against benefits. Such a scenario could be one, which is not an individual optimization problem but affects at least one other actor actively. Situations of strategic interdependence, where several actors try to achieve the same thing, or third parties cannot be excluded from the gains of individual action need to be addressed.10

The problem of such cooperation-instances is, that – remembering Hobbes – actors tend to behave intrinsically self-interested and selfish. Thus, the answer to the question how actors come to cooperate would be intuitively pessimistic. Actors are hardly motivated to pursuit anything else but their own good. Especially in a context, where there is no (central) power that forces actors to do otherwise or actively fosters cooperation, we would have to assume a low chance for cooperation.11

1. Two-Person Cooperation

To approach the issue of cooperation, it is helpful to look at a simplified, constructed setting. One such constructed two-person cooperation problem is the classic story of two farmers by philosopher David Hume.12

Two farmers’ – A and B – respective property borders a common marshland. If the marsh were drained, gains could be made. BUT if for example farmer A were to drain the march both farmers, A and B, would enjoy the benefits. So both farmers are eager to gain the benefits but try to avoid the work.13 Such a setting fulfils the requirements of strategic interdependence.

The difficulty of this cooperation problem becomes obvious if one looks at the payoff table. We assume that both farmers value a drained marsh at for example two utiles14, but expect the cost for draining it alone to be at three utiles. If they would work together, the work would be easier and cost only one utile each. The resulting payoff table would then be:15

Abbildung in dieser Leseprobe nicht enthalten

If one of the two farmers chooses to drain, his payoff is either 1 utile or -1, depending on whether the other farmer aided him. If a farmer chooses not to drain, he would receive either 2 or 0 utiles. So if one looks at the issue from a Rational Choice perspective, there are two reasons not to drain the march. First, each farmer does better if he chooses not to drain no matter what the other one does and second, since the payoff table is interchangeable between the two farmers and each farmer expects the other to be rational about the matter, they must hold the other one as most likely to choose not to drain for the very same reason they are likely not to drain.16 So each of the two has a dominant strategy to be uncooperative. This is not because the farmers do not want to cooperate, but simply because neither has an incentive and neither wants to be taken advantage of.17 Thus the actors can not act differently unless they forsake rational thinking. This Nash equilibrium18 is known as the paradox of cooperation, or – more famously – as prisoner dilemma or PD for short.19

The described outcome is – though possible – not always the one of social interaction as we know it. But what gives two actors an incentive to trust in each other, cooperate, and acquire the joint reward? In his underlying study of cooperation, Axelrod tried to answer this question when he asked what conditions cause egoists to cooperate.20

2. The Missing Piece – Repeat Play

Axelrod fully acknowledges the egoistic, distrustful tenor of rational actors. But, he wondered, what would the actors do if they knew they would meet more than just once. In fact, what if the farmers would have to consider they meet not only once but non-denumerably often? This, Axelrod claims, would alter the prospect from our simple -1/1 or 2/0 payoffs to include possible future gains or losses.

If the two farmers would come to cooperate and each reap the 1 util reward, chances are they will come to do so again and again, so that the complete reward would be 1+n with n being the number of utils earned in the future. If we assume that there are e.g. 4 marches to clear, then it is obvious that each farmer would gain 1+3 utils if they cooperate each time, but only 2 at maximum if one of them is unwilling to cooperate, as the other will surely not cooperate after he was made fools of. But what about that last march that is to be cleared? Logically, an actor would not cooperate the last time in order to maximize his payoff and obviously “there is no future to influence”.21 And, as discussed above, if he comes to think about it, he would have to assume the other actor surely thinks likewise about the matter. It would then be wise to deny cooperation at instance n -1. With this logic of backward thinking, it is possible to end up with both actors not cooperating at the very first time. Indeed, this is why it is necessary that the number of instances n is non-denumerable.

The critical point here is that any decision made by the two actors does not only affect the outcome of the present interaction, but also influences the choices the other actor will make in their next encounter.22

The Canadian mathematician Rapoport discovered that the best strategy to play in such an infinite instances cooperation game would be a “[…] policy of cooperating on the first move and then doing whatever the other player did on the previous move.”23 This behaviour fosters cooperation whenever possible while avoiding that the actor is being taken advantage off, at least not all too much.24

Axelrod calls this best response strategy TIT FOR TAT.25 It is noteworthy that this is not a purely cooperative strategy but a conditional one, as it fosters retributive justice and reciprocity.26 This most basic norm of reciprocity and retribution exists, as has been proved, within societies all around the world and across cultures. Although often referenced to the famous biblical quotation an eye for an eye a person does not need to come from a Judaeo-Christian background to hold this norm.

3. External Enforcement

Another option that fosters cooperation is in analogy to Hobbes a third – at best impartial – policing authority that penalizes non-cooperation or defection. An external enforcer is a very important approach to allow cooperation and the judiciary, contract law, and trials are nothing else than a modern administrative solution to increase the price for defection or breach of contract. From a Rational Choice standpoint, an external enforcer is arguably the most logic institution to enhance the chances for cooperation between rational actors.

However, there are spheres without central authority. The classic example is the sphere of international relations, where the void of a central authority is a defining fact. The UN-Charta ordains that a nation’s most important “right” is its sovereignty and its formal equality with other nation-states.27 Thus, according to the “pre-emptory norm” of International Public Law found in the UN-Charta Article 2.IV, it is illegal to interfere in any way that subverts the exercise of a nation-state’s sovereign rights.28 Consequently, there is no way to force another state to cooperate through a third superordinate enforcer. Institutions, regimes, or supra-governmental bodies like the EU are a crude way to address the cooperation problem on an international level and increase the likeliness of interstate cooperation, but their success always depends on the voluntary cooperation of the member states.

4. Interstate Cooperation – Principles and Facilitators

As remarked before, reciprocity is a solution to various non-zero-sum cooperation games.29 If one actor defects, however, reciprocity unleashes a wave of retaliation with no end in sight.30 To overcome this deadlock, other factors, such as monitoring and reasonable retaliation, become important. While applying the cooperation theory to the world of international politics, it is necessary to note that cooperation is defined as behavioural adjustment of actors to the actual or anticipated preferences of others.31 Thus cooperation is defined morally neutral and is not necessarily a “good deed”.

In international relations it is common practice to establish and upkeep institutions. But, and fundamental of Rational Choice, international institutions are seen as weak. The sovereign states that act within institutions and forums are the key to any cooperation, as there is no common authority present to facilitate cooperation. Nonetheless, regimes are the best alternative. Regimes form a platform for states and help administer and facilitate cooperation much more effectively than individual endeavours. They usually comprise “sets of implicit or explicit principles, norms, rules, and decision making procedures around which actors’ expectations converge in a given area of International Relations.”32 Dealings tend to become much more stable and reliable which often promotes cooperation in other areas as well (positive domino or splash effect).

But regardless of whether we talk about regimes or other means to facilitate cooperation, Axelrod postulates that there are three decisive dimensions for interstate cooperation that need to be heeded. These are: a) the mutuality of interest, b) the shadow of the future, and c) the number of players.

a. Mutuality of Interest

A key and maybe obvious factor to cooperation is the mutuality of interest. If two potential cooperation partners share the same goal, chances are higher that cooperation will take place and succeed. If, however, there is a conflict of interest about the matter of cooperation then there is a greater chance that one of the parties will defect.33 The issue gets a little more complicated, if one takes into account that interest is defined subjectively, meaning: “The payoff structure that determines mutuality of interest is not based simply upon objective factors, but is grounded upon the actors’ perceptions of their own interests.”34

b. Shadow of the Future

We already talked about the idea of this concept of repeat play earlier in chapter II.3., since Axelrod’s shadow of the future comprises of nothing else but the prospect of possible further gains in future encounters. Again, “the more future payoffs are valued relative to current payoffs, the less the incentive to defect today.”35 To appropriately measure whether future gains are a relevant variable and thus inducing cooperation, Axelrod postulates the following factors: a) long time horizon and b) regularity about the probability of future payoffs. An indefinite amount of time and a high chance of repeat situations with mutual interests are – as lengthily discussed – paramount for cooperation.36 Further items are c) reliability of information about the others’ actions, and d) quick feedback about changes in the others’ actions.37 In the international realm information is a fundamental factor. Actors need to be able to distinguish other actors’ behaviour, whether they cooperate or defect. In the reality of international relations, it is quite often hard to identify what another nation actually does. But this information is vital for a TIT-FOR-TAT strategy if an actor does not want to be exploited. Thus monitoring the other players is crucial for successful interstate cooperation.

c. Number of Actors – Monitoring and Sanctions

Another issue that seems rather obvious but has not been mentioned so far is the number of actors involved. For most interaction and especially cooperation it is imperative that actions can be identified and attributed to an actor.38 Thus the number of actors involved in a cooperative undertaking is highly correlated with the difficulty to effectively identify and sanction defectors. Another obstacle is the ability to focus retaliation on defectors,39 as with a high number of actors it may become increasingly challenging to precisely and effectively hurt one or several defectors without affecting partners. Third and last, the incentive and will to punish must be given, as without retribution defectors surly continue to defect if this causes gains without reproach (also called moral hazard).40

[...]


1 BBC News, Greek Protesters Hurl Coffee at German Diplomat, 2012, news article, BBC news, Available: http://www.bbc.co.uk/news/world-europe-20338529, 11. October 2013.

2 Klaus et al. Regling, Efsf Newsletter, Nov. 2011, Newsletter, European Financial Stability Facility, Available: http://www.efsf.europa.eu/attachments/201111-efsf-newsletter-n03.pdf, 03.09.2013 2013.

3 Stephen Evans, Cyprus Bailout. Feeling Unloved in Germany, 2013, BBC News, Available: http://www.bbc.co.uk/news/world-europe-21974496, 23.07.2013 8:27 PM 2013.

4 Nikolaus Blome, Nie Wieder Zahlmeister Europas!, 2010, Bild Zeitung, Available: http://www.bild.de/politik/2010/europa/an-unserer-kanzlerin-beisst-sich-europa-die-zaehne-aus-11968512.bild.html, 3.09.2013, 9:40 PM 2013.

5 Patrick Jackson, German Election. Voters' Views on Eurozone Bailouts, 2013, internet video, BBC news, Available: http://www.bbc.co.uk/news/world-europe-24034574, 20. September 2013.

6 Joachim Behnke, "Die Politische Theorie Des Rational Choice: Anthony Downs," Politische Theorien Der Gegenwart 2. Eine Einführung, ed. André Brodocz and Gary S. Schaal, 2nd and revised edition ed., vol. 2 (Opladen and Farmington Hills: Barbara Budrich Verlag, 2006) 496.

7 Shaun Hargreaves Heap, "Rationality," The Theory of Choice. A Critical Guide, ed. Shaun Hargreaves et al. Heap (Oxford (UK) and Cambridge (USA): Blackwell, 1992) 3.

8 Behnke, "Die Politische Theorie Des Rational Choice: Anthony Downs," 470 f.

9 André Kaiser, "Die Politische Theorie Des Neo-Institutionalismus. James March Und Johan Olsen," Politische Theorien Der Gegenwart 2. Eine Einführung, ed. André Brodocz and Gary S. Schaal, 2nd and revised ed., vol. 2 (Opladen and Farmington Hills: Barbara Budrich Verlag, 2006) 322.

10 Kenneth A. Shepsle and Mark S. Boncheck, Analyzing Politics. Rationality, Behavior, and Institutions (New York and London: W. W. Norton & Company, 1997) 201.

11 Shepsle and Boncheck, Analyzing Politics. Rationality, Behavior, and Institutions 4.

12 See David Hume, "A Treatise of Human Nature," ed. David Fate Norton and Mary J. Norton (Oxford: Oxford University Press, 2004), vol., Book 3, Part 2, Section 7.8.

13 Shepsle and Boncheck, Analyzing Politics. Rationality, Behavior, and Institutions 201.

14 The usage of the abstract measurement unit „utile“ was introduced by von Neumann and Morgenstern.

15 Shepsle and Boncheck, Analyzing Politics. Rationality, Behavior, and Institutions 202f.

16 Ibid. 203.

17 Ibid. 204.

18 For Nash equilibrium see for example: Ken Binmore, Game Theory. A Very Short Introduction (Oxford: Oxford University Press, 2007) 11ff.

19 For PD one may review any text book about game theory.

20 Robert Axelrod, The Evolution of Cooperation (New York: Basic Books, Inc., Publishers, 1984) 3.

21 Axelrod, The Evolution of Cooperation 10.

22 Ibid., 12.

23 Ibid., 13.

24 Avinash J. Dixit, Spieltheorie Für Einsteiger. Strategisches Know-How Für Gewinner (Stuttgart: Schäffer-Poeschel, 1995) 106.

25 Axelrod, The Evolution of Cooperation 31.

26 Volker Kunz, "Robert Axelrod, the Evolution of Cooperation, New York 1984," Schlüsselwerke Der Politikwissenschaft, ed. Steffen Kailitz (Wiesbaden: VS Verlag für Sozialwissenschaften, 2007) 25.

27 John H. Currie, Public International Law, 2 ed. (Toronto: Irwin Law Inc., 2008) 39.

28 Ibid. 40.

29 Robert and Keohane Axelrod, Robert O., "Achieving Cooperation under Anarchy. Strategies and Institutions," World Politics 38.1 (1985): 244.

30 Ibid.

31 Axelrod, "Achieving Cooperation under Anarchy. Strategies and Institutions," 226.

32 Ibid.

33 Ibid., 228ff.

34 Axelrod, "Achieving Cooperation under Anarchy. Strategies and Institutions," 229.

35 Ibid., 232.

36 Ibid.

37 Ibid.

38 Ibid., 234.

39 Ibid., 235.

40 Axelrod, "Achieving Cooperation under Anarchy. Strategies and Institutions," 235.

Excerpt out of 33 pages

Details

Title
How Individual Rationality can cause Political Constraint that inhibit Financial Support
Subtitle
An Analysis looking at German Political and Domestic Discrepancies after the 2009 Sovereign Debt Crisis
College
University of Freiburg
Course
Rational Choice and Neo-Institutionalism
Grade
1,7
Author
Year
2013
Pages
33
Catalog Number
V960797
ISBN (eBook)
9783346309129
Language
English
Tags
Rational Choice, Sovereign Debt Crisis
Quote paper
Tobias Rentschler (Author), 2013, How Individual Rationality can cause Political Constraint that inhibit Financial Support, Munich, GRIN Verlag, https://www.grin.com/document/960797

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