Ülo Ennuste Economics

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Ülo Ennuste’s Speech at the Inauguration of Honorary Doctors of International University Audentes, September 26, 2007

22 Sept-07


Mr Chairman, Ladies and Gentlemen,

it is indeed a great honour and privilege for me to be here today in this historic

building, with my distinguished colleagues, at this most outstanding Estonian

private university.

I hope that this great honour will not have a corrupting impact on my humility,

my teachability, and my acceptance of criticism, characteristics that are the rule

among our colleagues; and I hope that this would not make me forget – there is

never such a phenomenon as a free lunch.

Thus, if you will permit me, I would like to invest a couple of minutes of your

time as the first instalment.

In a speech on a similar occasion, Milton Friedman asked for permission to use

his speaking time to return to the one specific problem that he had not, as of yet,

managed explicitly and clearly enough to explain: what a marvellous thing to

say. In my case such an approach would amount to hundreds of topics.

Therefore, I would like instead to draw your attention to a certain most

paradoxical problem in Political Economics that has, to my mind, not yet been

studied thoroughly enough

“- the politicians in the nation states

– have their own political camp, they

have their political supporters, and

they would like to adjust themselves

to the requirements and expectations

of this part of society.”

András Inotai (2007)

Let me remind you of one peculiarity of political economics, which is especially

significant in transition economies. Politicians’ public announcements and

hidden activities about economy, which can be considered mostly rational and

productive in the political field, may turn out to be mostly non-truths or

distortions of truths or lies or errors from the point of view of mainstream

economics and harmful for national economy (why politicians lie – i.e. to get

elected; to get rents; to get elected in order to get rents).

This puzzle may be a very productive topic for further research – the design of

implementing mechanisms for political/economic truth-telling. This certainly

would be intellectually most challenging and mathematically extremely

complicated, although a cumbersome field, at least compared to the innocent

headings. I sincerely hope that the mathematical modelling studies in

this field wouldn’t turn out to be intellectual or mathematical bubbles, such as

we have witnessed many times before.




Research proposal for the study of political-economic truth-telling: the

design principles of informational implementing mechanisms


“Truth is one, error is many.”

Simone de Beauvoir (FT Jan 24/25 04)

One of the paradoxes in Political Economics is the generally noted situation in

reality, especially in transition countries, that the plethora of public open

messages and announcements and perceived hidden activities concerning

national economy which are considered politically as mainline absolute and

rational statements and activities, may, from the perspective of mainstream

economics, come to be almost certainly considered as absolute non-truths

(distortions of truths/lies or elementary faults/error messages).

There is no doubt that such a phenomenon makes for rational economic

decision-making the knowledge infrastructure contradictory, uncertain, and not

convenient for learning to the actors from the message exchanges, and would

cause coordination failures and wrong or suboptimal economic solutions.


 “There is a second world that

exists side by side with the first,


J.M. Coetzee (2006, Slow Man. Vintage

Books, 122)

The trouble is that the political (say, secondary for economy) world has a

different “ends and means” system and other social desiderata and “methods

employed for their realisation” (Huxley 1938), methods that are sometimes

outside the rational world from an economic ideals viewpoint. But the messages

cascades of both subsystems of this politico-economic double system have

intersections, and they intertwine with each other; and if a society lacks the

adequate delicate mechanisms to balance and coordinate the contradictory

asymmetric information cascades, trouble will develop, and economic

breakdowns almost certainly will loom.

With stated above, I’m not trying to give the impression that: 1) everything that

is said in mainstream economics is true; perhaps it is searching for the truth but

economists can be ideologues/stategic/erroneus too, and that is in the following

not forgotten (how could they emit only truths as the statistics is mainly

designed for political discussions and the study objects are almost “cloud-like”

(Karl Popper), 2) also by economics mainstream, I’m referring mainly to EU

economists, and considering Estonian idiosyncratic conditions (Ennuste 2007),

understandably many items in my list would not be agreed upon by e.g. many

US mainstream economists (Gary McMahon’s remark) and 3) what is here

meant by political economics: i.e. the relationship between political decisions of

distribution and economic allocation decisions of creation of national wealth and

designing institutional evolution, thereby discussed mainly on the basis of

modern mathematical Bayesian game theories (Persson and Tabellini 2002).

Thus, on the basis of the turmoil of the existing conflicting and asymmetric

economic policy communication knowledgebase, decentralized rational

economic decision making is almost impossible, especially in the public

economic sphere and the knowingness of some economic agents may even

lessen in the communication.

And it seems our information coordinating/regulating and learning stimulating

mechanisms in this field are far from adequate.

Furthermore, the economic damage inflicted may depend on the

importance/power of the agent and the significance of the issue. We shouldn’t

here forget also the phenomenon of “spin-doctors”. It captures the fact when a

person is not explicitly lying but is implicitly lying by giving only selected

information and, in fact, leaving anything out that is harmful to what s/he wants

or his/her conclusions.

“One danger is the very

irresponsible ”mental

contamination” carried out by some

politicians in all of the new member

countries as well as in the old ones

too. This mental contamination is

much more costly than

environmental contamination.

Environmental contamination can be

eliminated. It is a question of

technology – we do have this

technology – and it is a question of

financial resources. But mental

contamination sometimes needs a

generation to be eliminated or


András Inotai (2007)

The most draconian macroeconomic “results”, certainly partially inflicted from

our “mental contamination” and therefore inadequate knowledge assets and

inadequately knowledge based informational coordinating mechanism situation,

are: high and rising inflation and economic inequality, no euro in the foreseeable

future, international investment position is worsening, huge current account

deficit, flight of labour, high loan burden of households, EU “sugar penalties”,

official statistics is not necessarily dense for a transition country, Lissabon

Agenda has fallen into oblivion, economic climate mentally contaminated etc.

And, most importantly, our socio-economic institutional systems and

mechanisms are not evolving on the knowledge base reforming, but only in a

spontaneous belief-chaotic tumble and stumble mode evolving in the directions

of civilized desideratum (Ennuste 2007).

Perhaps imaginary numbers would help?

In the elementary economic world the studies of truth-telling mechanism design

are rigorously and formally carried out mainly in the field of Institutional

Economics (for detail see e.g. Appendix or Ennuste 2006). Some noticeable

practical “technological” results have been achieved (Matsushima 1993, Aoyagi

1998, Ennuste 1999, 2006), especially in the case of the assumption agents’

correlated information and extensions of the models with side-payments

(Google’s definition: “bribes”).

Importantly, the epithet “side” will be justified until public knowledge creativity

and dissemination activities are not incorporated into national accounting system

and GDP as investments (Marrano et al 2007), and vice versa, distortions in the

knowledge emission as losses of the GDP.

The proof of the existence of knowledge based side payment implementing

mechanism in economic environment is expediently proved on the Cauchy-

Schwartz inequality (Aoyagi 1998).

But in the case of complex politico-economic double systems, these issues are

much more complicated, e.g., the complexity should stay in the comparison

results (quotients) explicitly: in these mechanisms the political and economic

policies should be analysed in one complex but still separately, as side payments

for political effects (probably nonmonetary) should be decided by political

coordinators and economic transfers by economic regulators.

Still, there may be a probability that the curse of complexity may be eliminated

and problems rigorously (not heuristically) solved by the help complex numbers

as there seems to be a certain affinity between complex numbers and vector

plains where Cauchy-Schwartz inequality exists, plus the phenomenon that

complex numbers are divided but vectors not. Analogously, as Arrow’s

Prisoner-Dilemma is vanishing in the Harshaniy’s Bayesian Game. But,

additionally, the imaginary unit i=sqrt(-1) may play a complicated role as

the indicator of the “other world” for the real economic world.

In brief: The rationality connecting imaginary units with a dual world policy

regulation mechanisms may be schematically grounded on the reasoning: 1) it is

convenient to model complex policies on the bases of vector-like constructions,

2) for efficient comparison of complex policies mechanisms should carry out

division procedures of policies with vector-like quotients, 3) one such

convenient division procedure is well-defined for complex numbers.

One scheme for that is given in the Box.



Where the Im axis may be interpreted as the “imaginary political” coordinate, Re as the economic

coordinate, real numbers x and y may be e.g. the Blackwellian iformativeness measures of the

announcement powers (e.g. dependent on the economic weight of the announcement and

importance/credibility of the actor) E.g.: hypothetically it would be appropriate to model the side payments

sign calculation for the agents on the basis quotient:

(cos j+isin j) r/r*

where r* is fixed real (=x*>0, y*=0) denoting the module of mainstream real economic truth, i the

imaginary unit, the module of the actors informativeness power, and j is the angel of rotation of the

agents announcement from economic truthfulness.

Hypothetically the amounts of the side payments would be convenient to base on (cos j )r/r* and

i(sin j) r/r*( first as for economic and second as for political side payment (e.g. c/x-x*/ and e+(/yx*/

i), where // is absolute value, and the last expression (…) may hypothetically be squared. The first

may be monetary and the second nonmonetary (…)

Note: above was given the most trivial introductory explanation of the model, and as yet, the

hypotheses need to be verified and certain theorems proved.

It is easy to see now, in the case of enforcement of the described stimulation

mechanism, that the best message strategy for the agents may be zero or

minimum distortion and maximal Bayesian learning in the case of repeated

communication and information exchanges (Foster, D. and Young, H. 2003,

Ennuste 2006).

And most importantly, the mechanism discreetly differentiates the political and

economic side payments. The last makes the political agents more careful to

choose populist statements and their timing: to select those that are less

confusing for economic decision making and so less harmful (less costly) and

perhaps more quickly to eat their demagogical words from there election




Discussion, Caveats, Apologies


The rationality connecting imaginary units with a dual world policy regulation

mechanism may be schematically grounded on the reasoning: 1) it is convenient

to model complex policies on the bases of vector-like constructions, 2) for

efficient comparison of complex policies mechanisms should carry out division

operations of policies producing vector-like quotients, 3) one such convenient

division operation is well-defined for complex numbers.

But provisionally the dilemma still remains: has the imaginary unit (square root

equals minus one) a clear logical economic interpretation in substance? E.g. in

our results one hypothetical intuition of imaginary unit may be as a conversion

operator of currency transfers into political prizes: price into prize.

If clear explanations concerning the economic essence of i should fail, the

imaginary number may still remain in economics as a convenient mathematical

technical tool, as indication operator or so, as it is found place in solving

dynamic differential models.

Also, perhaps it is useful here to remark that the catastrophe theory functions

have once already been thrown out from economics as bubbles, but recently it

was discovered than in this case the baby had been thrown out with the

bathwater (Rosser 2007), especially in the case of transition economics.

As remarked in the text many times over, the main statements should be taken as

a working hypothesis. Instead of complex numbers other models may be used.

The intuition of the above politico-economic announcement policies

comparativeness model is based entirely on the “blue-sky economics” (y*=0) for

the introductory conveniences. For more advanced discussions e.g. model

(cos( j – j*) +isin( j – j*)) r/r*

may be introduced, squared models used, the definitions of the axes changed etc.

If somebody happens to be dissatisfied with her/his position in the Table, with

the estimation her or his “infromativness footsteps” – there is always the

possibility to compose a dual table based on “political truths” as real (horizontal

axis). This should change the position situation completely.

And most importantly, the exposed estimations are based entirely on the bluesky

economics plus my own one-man “Gallup” of the person “informed by

theory” mainly.

My sincere apologies indeed.



The author has benefited from comments by Gary McMahon, Knut Sydsæter,

Tõnu Puu, Jouko Yla-Liedenpohja, Ants Aasma, Alari Purju, Madis Aben,

Kersti Linask and discussants at the EAEPE 2005 conference in Bremen.

The remaining errors are my own.

Permanent support from my family to my research is deeply appreciated.


Mr Chairman, Ladies and Gentlemen,

I am deeply grateful to you not only for the honour you have conferred on me,

but equally for your attention and for the aspirations of this very university to

enhance Estonian intellectual capital, perhaps, in spe even in the perspective on

the field of knowledge based optimal truth-telling mechanism design and

complex number modelling of the dual politico-economic systems.

It is special for me to share the reflected glory from my fellow economist,

eminently distinguished András Inotai.

My apologies for being beyond measure technical.

References and related publications


Aoki, M. 2001. Toward a Comparative Institutional Analysis. Cambridge, MA, MIT


Antonelly, C. 2005. Models of Knowledge and Systems of Governance. – Journal of

Institutional Economics, 1, 51-73.

Aoyagi, M. 1998. Correlated Types and Bayesian Incentive Compatible Mechanisms

with Budget Balance. – Journal of Economic theory, 79, 142-151.

d’Aspremont, C., Crémer, J. and Gerard-Varet, L.-A. 2004. Balanced Bayesian

Mechanisms. – Journal of Economic Theory, 115, 2, 385-395.

Baliga, S. 1999. Interactive Implementation. – Games and Economic Behavior, 27, 38-


Callander, S and Wilkie, S. 2007. Lies, Damned Lies, and Political Campaigns. – Games

and Economic Behavior, 60, 262-86.

Chakraborty, A. and Yilmaz, B, 2004. Informed Manipulations. – Journal of Economic

Theory, 114, 132-52.

Chambers, C. 2004. Virtual Repeated Implementation. – Economic Letters, 83, 263-268.

Eliaz, K. 2002. “Fault Tolerant Implementation”, – Review of Economic Studies, 69, 589-


Ennuste, Ü. 1969. Uncertainty, Information and Decomposition in the Planning of the

Production System. – Economics of Planning, 9, 3, 258-266.

Ülo Ennuste. 1999. On a Bayesian Mechanism Planning Model of the Shaping the CEECs

and EU Accession and Enlargement Decisions. In: Ülo Ennuste and Lisa Wilder (eds.),


Related Conceptual and Methodological Frameworks, Tallinn, 343-359.

Ennuste, Ü. 2001. Quasi-Implementing Design Mechanisms and Primary Determinants:

Estonian Empirical Illustrations. In: Ü. Ennuste and L. Wilder (Eds.), Factors of

Convergence: A Collection for the Analysis of Estonian Socio-Economic and

Institutional Evolution, Tallinn Technical University, 325-361.

Ennuste, Ü. 2003. A Linear Planning Analysis of Institutional Structure in the Economy.

In: Ü. Ennuste and L. Wilder (Eds.), Essays in Estonian Transformation Economics.

Tallinn Technical University, 265-279.

Ennuste, Ü. 2006. Meta-synthesis Approach to Economic System Implementation

Mechanisms. In: Simulation and Optimisation in Business and Industry: International

Conference on Operational Research, May 17-20, 2006, Tallinn, Estonia / Eds. H. Pranevicius

[et al.]. Kaunas: Technologija, 2006, 9-12.


Ülo Ennuste. 2007. Dual Market-Transition in Estonia 1987-2006: Institutional

Mechanism Analysis Approach. In: “EUROPE AFTER HISTORICAL

ENLARGEMENT”. The Proceedings of 5th Audentes Spring Conference, Apr. 28 2007,

Tallinn, 60-126. http://www.ies.ee/iesp/No3/

Foster, D. and Young, H. 2003. Learning, Hypothesis Testing, and Nash Equilibrium. –

Games and Economic Behavior, 45, 73-96.

Huxley, A. 1938, Ends and Means. Chatto and Windus, London.

Inotai, A. 2007. Economic Patriotism Fuels Populism and Demagogy.



Kalai, E. and Ledyard, J. 1998. Repeated Implementation. – Journal of Economic Theory,

83, 308-317.

Kaminski, M. 2004. Social Choice and Information: The Informational Structure of

Uniqueness Theorems in Axiomatic Social Theories. – Mathematical Social Sciences, 48,


Koessler, F. 2004. Strategic Knowledge Sharing in Bayesian Games. – Games and

Economic Behavior, 48, 292-320.

Marrano, M., Haskel, J. and Wallis, G. 2007. What Happened to the Knowledge

Economy? ICT, Intangible Investment and Britain’s Productivity Record Revisited.

Working Paper No. 603, Queen Mary, University of London.

Matsushima, H. 1993. “Bayesian Monotonicity with Side Payments”, – Journal of

Economic Theory, 59, 107-121.

Matsushima, H. 2003. Universal Mechanisms and Moral Preferences in Implementation.

Discussion Paper CIRJE-F-254, Faculty of Economics, University of Tokyo.

Myatt, D. and Wallace, C. 2004. Adaptive Play by Idiosyncratic Agents. – Games and

Economic Behavior, 48, 124-138.

Nehring, K. 2004. The Veil of Public Ignorance. – Journal of Economic Theory, 119,



Parreiras, S. 2005. Correlated Information, Mechanism Design and Informational Rents.

– Journal of Economic Theory.

Persson, T, and Tabellini, G. 2002. Political Economics: Explaining Economic Policy.

MIT Press, Massachusetts Institute of Technology, 533 p.

Pryor, F. 2005: Market Economic Systems. – Journal of Comparative Economics, 33, 1,


Rosser, J. 2007. The Rise and Fall of Catastrophe Theory Applications in Economics:

Was the Baby Throun out with the Bathwater? – Journal of Economic Dynamics &

Controle, 31, 3255-80.

Serrano, R. and R. Vohra. 2001. “Some Limitations of Virtual Bayesian

Implementation”, – Econometrica, 69, 785-792.


November 9, 2008 - Posted by | Uncategorized

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