Ülo Ennuste Economics

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Draft 21.III 12

 Draft 30.III 12. For the “Baltic Journal of European Studies“ Vol 2, No 1, 2012. Do not quote

 Waiting for the Commission Strengthened Governance Coordination Leviathans: Discourse Memo for the Actors in the Macro-Game “European Semester”

                                                          Ülo Ennuste


This is entirely applied paper for additional implementation of extant rich macroeconomics knowledge resources to facilitate the “European Semester” possesses – the novelty may be that in this implementation the sensitive problems of deteriorating institutions and destructive activities are not entirely disregarded, and we are explicitly demonstrating that the quality of the agents knowledge structures may have basic role and importance in reaching effective equilibrium projections in this game.

From the viewpoint of Modern Heterodox General Macroeconomics (Macro) the most powerful economic policy statement by the European Union was made in “Lisbon Agenda 2000”: the economy should be knowledge based. That means that Union and Member States socio-economic institutions and strategies policy projections should be designed knowledge based. Meaning that these should be based on modern high level evolutionary institutional theory, dynamic macro mechanisms design theory taking into consideration uncertainties and rare destructive shocks, Bayesian learning, with limited rationality and strategically playing actors, and national knowledge structure idiosyncrasies  etc.

From the Macro view the latest important governance policy invention from the Commission was the enforcement of the “six-pack” Regulations – especially the central package “THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION. 2011. Regulation for „on the prevention and correction of macroeconomic imbalances“ introducing the “European Semester” (ES) mechanism for ex ante activities in the prevention and correction of macroeconomic imbalances of the Member Stares in real-, financial- and institutional-economic designs, and  strategic policy projections. Last but not least we add a field of indepth central coordination enhancing the qualities of national and central knowledge and statistic structures for thither disclosure and transparency (Walker 2007), and especially for correcting and preventing informational distortions and destructive logical or political skews (Cotton 2012, Ennuste 2007).

Although the Regulation is narrative it is easy to see that the content may be adequately modelled mathematically as a dynamic informational cooperative game with side-payments for design of equilibrium institutional and strategy policy projections – in the framework played by the actors as the Commission’s professoriate Committees, the EU Parliament, the ECB and the Member States, etc, and complexly coordinated  combined horizontally and vertically as by consultations and side-payments (material and moral) and by limit-constraints (Ennuste 1978).

If so it is most convenient mathematically rigorously to study necessary and sufficient conditions/postulates for the actors to fulfil successively that the game solutions will be implementing (see e.g. Changchen and Yunfeng 2010, and Serrano and Vohra 2001):  the equilibrium policy projections will be optimally balanced. Most importantly some of these postulates are in this Paper formulated as Memo-points for the Member States as well for the Central coordinator, and for discourse arguments of these points Notes of extracts from top level pre-reviewed corresponding research papers are presented inc Estonian examples.


I thank Pekka Ahtiala and Alari Purju and two anonymous referees  of this BJES whose helpful advice, comments and discussions allowed improving significantly the analysis. Financial support from the Editor-in-chief of the BJES Aksel Kirch personally is gratefully acknowledged.


Introductory Meta-Remarks

General Remarks. Coordination theme is the basic socio-economic problem, as Friedman (1962, 12) has postulated: “The basic problem of social organization is how to co-ordinate the economic activities of large numbers of people.”

Coordination theme in the Modern General Macro belongs to the domains of Institutional/Evolutionary Economics and Mechanism Design Theories (N1) – the first is happily enough more or less a narrative one. But the last one is nowadays rigorously formalized, based on heavyweight mathematics:

Mechanism design theory is a branch of game theory … and extends the application of game theory to ask about the consequence of applying different types of rules to a given problem.” (Rojal Swedish Academy of Sciences 2007), and see also e.g. Ennuste (1978 and 2003) on an example of theoretic optimization model of building of national socio-economic institutional and real economic structure in interactions in a one complex-model – the decomposed solution of this model will derive solution games in the same class presented in ES mechanisms (a complex mechanism combining horizontal and vertical stimulating with side payments consultation coordination, Ennuste 1978) schematically on the Figure.


Source http://ec.europa.eu/economy_finance/articles/euro/documents/com_367_european_semester_en.pdf

From the Macro point on of the most promising section in ES seems to be:

“Article 5

In-depth review

1. Taking due account of the discussions within the Council and the Eurogroup referred to in

Article 3(5), or in the event of unexpected, significant economic developments that require

urgent analysis for the purpose of this Regulation, the Commission shall undertake an indepth

review for each Member State that it considers may be affected by, or may be at risk

of being affected by, imbalances.

The in-depth review shall build on a detailed analysis of country-specific circumstances,

including the different starting positions across Member States; it shall examine a broad

range of economic variables and involve the use of analytical tools and qualitative

information of country-specific nature. It shall acknowledge the national specificities

regarding industrial relations and social dialogue.

The Commission shall also give due consideration to any other information which the

Member State concerned considers to be relevant and has communicated to

the Commission.”

Naturally keeping in mind that “a broad range of economic variables” involve social variables like economic inequality, poverty as well institutions/mechanisms structures, and national knowledge paces (Ennuste 2008 with many references) etc. And that “country-specific” idiosyncrasies involve broader than that approach e,g, politically sensitive variables like ethnical heterogenty etc. We have here to notice that in the small Member Sates situated nearby big States the high ethnic heterogeneity may be such a deteriorating phenomenon (Ott and Ennuste 1996) and that the problem may not be solved endogenously and deserves coordination on the higher political level.

And most importantly, we have by that to keep in mind Rothstein’s (2009) anti-devolutionary third argument: “The third argument is that it is unlikely that such mechanisms will be efficiently designed/evolved/adapted endogenously by communicating actors. Moreover, if such institutions have been created, we should expect market agents to try to destroy them.”

These  kind of “endogenous impossibility” problems  may be very important to consider in the central coordination agendas e.g. specially for  the effective institutional design and correction projections: it may be that some mechanisms are coalition-politically skews (Cotton 2011) and to the banking and magnate lobbing askew – and there may be the case that the opposition has endogenously not enough bargaining power to correct this endogenously (Ennuste 2009) without central coordination.

In this “endogenous” and outside coordination context it seems we have to introduce here term “semi-endogenous” – see here the interesting extract from Boettke and Fink (2011):

“…We respond by stressing that institutions structure the incentives underlying individual action, secure private property rights are indispensable for prosperity, institutions have a first-order effect whereas policies only have a second-order effect, successful institutional change comes from within a society, and, given the status quo of developing countries, first-world institutions are likely not to be available to them. … “.

Of course the article is not trying to advance understanding that current dominant Macro discourse on institutions, economic policies and development shouldn’t be taken without  any critical examination (see more (N3) Chang 2011).


In the Estonian case one of the most urgent indepth examination examples in the ES procedures may be the existing presently anomaly “zero profit-tax”. Probably a politically skewed mechanism and according to many Macro conceptions dysfunctional in the aspects of sustainability  – in favour to haves and product probably of incompetent short-termism of the law making and lobbing of the magnates (Ennuste 2009). And it seems there is shortage of oppositional political bargaining power endogenously to correct that in the foreseeable future without exogenous coordination. Indeed – a section from the Estonian Government recent projection by 2020 pp 29-30 postulates:

17. Continuing the gradual reduction of taxes on labour and profits and to increase taxes on consumption and use of natural resources.

… Efforts must be continued to harmonize indirect taxes that have a significant impact on the functioning of the EU internal market and to abolish exceptions in the EU. Direct taxes and tax systems (rates) reflect every country’s specific and unique social and political choices, and thus the principle of freedom of choice of member states must remain in place in this regard.

Continuing the gradual reduction of taxes on … profits  and to increase taxes on consumption … “

It is easy to see this section has fuzzy logic as:

a)      the corporate profit tax in Estonia has been  already about dozen years annulled to zero (sic!) and so gradual reduction of it is an absurdity in the macroeconomic context

b)      unethical is to speak about local profit tax reforms neglecting harmonization with the Member States especially in the aspect of competition on capital markets, and incompetently neglecting dis-functionality  problems domestically as well (see more in N3).

 Deus ex machina: it seems the ES process should first of all in the periphery Member Countries limit the implementation of bad policies mechanisms due to incompetent governance based on low quality public socio-economic knowledge space. As it seems obviously some “small” governments of these Member Countries have also not enough political bargaining power against devolutionary camps for the rational implementation of knowledge based policies and reforms for sustainable development.

Estonian End-Note: sustainability regeneration ES mechanism equilibrium policy does exist in the proper following of the Macro-concepts proposed in this Memo. Our political administration should focus to trying apply these efforts constructively.

The European Semester professoriate has an obligation to criticize and improve those policy efforts in the field in institutional designs and as well in intervention strategies, and most importantly not to close ayes in the cases of devolutionary activities.

But if local devolutionary politics is allowed to split the discipline, and communication discourse across that divide continues to break down, the ES game actors will forfeit what little administrative coordination power/respect it commands and/or how little respect has been given to the Macro concepts and tools especially in the Estonian case to social capital formation and institutional skewness and most of all to the quality of Macro competence.


Memo Notes

A. Macro has Progressed towards Constructive Operational theory (N1)

Especially technically in the field of mathematical mechanisms design (see e.g. Nobel 2007), and in the field of Institutional  Economics e.g. including political corruption modelling (e.g. Holcombe and Rodet 2012), and so also in the classical branches especially considering limited rationality and Bayesian learning (Nobel 2011), and in the field of uncertainty considerations in the economic policy projections (Phelps 2006) and North (1990) on institutional change and economic performance, market economic systems concepts (Pryor 2005), and in general  by Phelps (2006) on macroeconomics position for a modern economy.

McMillin (2012): „In her article “Macro has progressed”, Kozicki argues that assessing progress in macroeconomics by focusing on the use of DSGE modeling is too narrow a focus, and, accordingly, she considers advances in macroeconomics outside the core DSGE framework. As evidence of progress in macroeconomics, she points to enhanced understanding of financial crises, a broadening in the theoretical and empirical treatment of expectations formation and how expectations are incorporated in macro models, and improvements in our understanding of linkages between the real and financial sectors.”

We have to add here to this “narrow macro” that especially great progress has been in including financial indicators into large macro-forecasting models that had produced dozens of excellent results in the prediction of the previous global crisis (Bezemer 2009a).

In the Estonian empirical post-crisis conditions (Ennuste 2009) and in the framework of the ES coordination mechanism the progressed Macro-concepts and -tools may be progressively implicated for the optimisation of national economy sustainability probability enhancement – first of all in the enhancement of the quality of national public socio-economic knowledge structure, in the control and regulation of human and real and social capital mechanisms and strategies, and in other fields of public economics – instead of regrettable present dominating incompetent use of micro- and meso-economics.

B) The SE-Estonian equilibrium socio-economic knowledge structures have to be compatible and undistorted (N2)

Macro has many theorems verifying the important implications of the actors’ knowledge spaces credibility levels on the quality of the equilibrium solutions (see e.g. Ennuste 2008 and References).

From this aspect the extant low credibility and slowness of some Member States public knowledge space should in the first of all be basically adapted to IT-technology and harmonized with the Eurostat and ECB  standards (that should be also improved). Meaning – the overall statistics made more transparent and comprehensive, less politically distorted, and more efficient in equilibrium designs and policy projections – for ex-ante prevention of macro-economic imbalances, and so with the Eurostat.

E.g. unfortunately, e.g. at present such significant indicators as Estonian high national gross external debt, current account and balance of payments, international investment position are not integrated into compact statistical framework. More than that – there are in the administrative statistics indicators dominating that are in Macro sense not credible like PPS currency, especially in comparisons of the euro-zone countries. In the same sense it is not sufficient to have in the official statistics just one kind of inflation, especially in the Baltic-Rim countries (e.g. Finland has introduced two inflation indicators).

In the Estonian case the national knowledge space is contaminated with politically distorted concept à la “we are the best” to hide real strategies of some political camps for the reasons of the political stability like (ironically) “survival in the crisis only for richest” etc, and other  Macro-theoretically absolutely non-sustainable boasting concepts like “we have been the first to come out of crisis” etc – and fulfilled with fuzzy logic plus populist incompetent outdated market concepts based probably on microeconomics at the best. And dominant understanding among local management seems to be “no capital outflow taxes” although these may be welfare improving in present conditions (Kitano 2011).

And we have not to forget among the informational distortions the skewness problems in the Cotton (2012) sense, and that skewness angle is easily measured on the complex plain (Ennuste 2007 Sept).

These regrettable phenomena, alas, also amplified by the Estonian mass media are helping to play down cognition of the real severity of the present socioeconomic hyper-crisis situation, and not enabling making high quality forecasts – and in turn significantly magnifying the national socio-economic sustainability risks.

Unfortunately, most of the suggested points stand no chance of easy corrections endogenously. Adopting ES coordination policies in these areas would require high competence and quality of political leadership, according by existing policies, there is lack these qualities, and the current Commission staff in Brussels seemingly prefers (by existing policies) not to notice these local objective idiosyncratic shortcomings of economically insignificant countries, at least in the bilateral consultation and harmonization processes.

C) Coordination of Institutional Changes and Designs First (N3)

This Macro analytical paradigm is especially propagated by the Journal of Institutional Economics and the Journal of Public Economics. Recent publication by Ostrom and Basturo (2011) states. In order to adequately address the most pressing social and environmental challenges looming ahead, we need to develop analytical tools for analyzing dynamic situations – particularly institutional change.“

Most urgent indepth institutional problems for the Estonian economy are in the field of rationalization and harmonisations of tax system and corresponding reforms: in

the sense of harmonization of investment competition with Member States and

lowering the risks of domestic capital flight without domestic taxing and

avoiding worsening of the Estonian international investment position. And

most importantly, presently there is a lack of coordination between income

tax law and national pension law – all these imbalances are increasing risks of deepening the economic imbalanced inequalities, impoverishment and emigration.


D) Equilibrium economic correction and intervention policy (N4)

The crisis has shown that macroeconomic policy in the Baltic Rim region needs to be better coordinated regionally, especially when it comes to protection of the Baltic about „free” movement of “all kinds” of labour, credit, investments, financial obligations etc, considering seemingly growing economic differences between the Baltic- and Nordic-Countries in after-crisis etc (by the way: to alleviate euphemistically these inequalities the Eurostat is using imaginary PPS “parity-prices” – actually local deflators. By the way these PPS prices are in Macro conceptions just burring the picture and confusing effective coordination and dissemination of  grants, in sub-region at least.

What concerns the fiscal deficiencies from the Macro angle it seems first of all in this game as a symptom – in the Estonian case caused by highly toxic cocktail from dysfunctional institutions: zero profit-tax with complementary misbalanced social taxing, no taxes for capital outflows, plus inflationary indirectly confiscating taxing – with  political impossibility for endogenous corrections no national bank’s interventions etc.

Discourse Notes

Caveat: All argument- extracts are separated purely from credible pre-reviewed non-commercial public publications

(N1) Coordination in the Macro

Coordination theme in the modern macro-economics generally belongs to the domains of Evolutionary Economics and Mechanism Design Theories – the first is happily enough more or less a narrative one. But the last one is nowadays rigorously formalized, based on heavyweight mathematics see:

a)     2007 Nobel Prize in economics: “Mechanism design theory is a branch of game theory (NB: generally dynamic Bayesian mathematical game theory. ÜE) … and extends (sic! e.g.on the field of social behaviour, animal spirit etc. ÜE) the application of game theory to ask about the consequence of applying different types of rules to a given problem.” and see also e.g. on an example of theoretic optimization model of building of national socio-economic institutional structure.

b)    Nobel 2011 Prize in economics considers in the econometric models limited rationalty : http://www.nobelprize.org/nobel_prizes/economics/laureates/2011/advanced-economicsciences2011.pdf

As the politicians and lawmakers (the implementers of institutions) as a rule don’t know mathematics and hate it and high level tedious scholarship in general, they try, especially in this very crisis period to claim that mathematical macro-economics is to blame as the significant destabilizing factor, not able to forecast important socio-economic events and is no good altogether and whatsoever.

But, this is absolutely not true (Bezemer 2009a), actually slander: first of all, the high level, e.g. Nobel domain, mathematical macroeconomic theories, are in the mainstream credible, these contain all the uncertainties and moral hazards of animal spirit in all varieties (limited rationality, strategic manipulative distortion of communication, incompetence, greed etc), and these theories should be implemented especially in the times of crisis (Bezemer 2009b).

Holcombe and RODET  (2012)  Rule of law and the size of government:


 If those with political power benefit from corrupt institutions, rulers might not adopt the rule of law so the ruling class can command a larger share of a smaller pie. An empirical analysis reveals that the size of government is larger in those countries that enforce the rule of law. If government expenditures provide some measure of the ability of the ruling class to command resources, this suggests that those with political power could benefit from imposing a fairer and more objective legal structure. Another conjecture is that those in power maintain corrupt governments to pay off their supporters and enhance their ability to remain in power. However, the rule of law is also positively associated with political stability, so better enforcement of the rule of law also enhances the ability of incumbent governments to remain in power.

McMillin, W. Douglas ( 2012):

“ … Several papers that address the issue of progress in macroeconomics are presented in this section, which takes its title from an article entitled “Has Macro Progressed?” submitted to the Journal by Ray Fair. We took the opportunity of the submission of Fair’s provocative article to solicit the views of other macroeconomists regarding progress in macroeconomics. Fair’s paper along with papers by Peter Howitt, Sharon Kozicki, and Harald Uhlig are presented in alphabetical order in this section. … “

Nobel Museum (2007) Press Release:

“The Royal Swedish Academy of Sciences has decided to award The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2007 jointly tom Leonid Hurwicz, University of Minnesota, MN, USA, Eric S. Maskin, Institute for Advanced Study, Princeton, NJ, USA and Roger B. Myerson, University of Chicago, IL, USA “for having laid the foundations of mechanism design theory.”

The design of economic institutions

Adam Smith’s classical Metaphor of the invisible hand refers to how the market, under ideal conditions, ensures an efficient allocation of scarce resources. But in practice conditions are usually not ideal, for example, competition is not completely free, consumers are not perfectly informed plus privately desirable production and consumption may generate social costs and benefits. Furthermore, many transactions do not take place in open markets but within firms, in bargaining between individuals or interest groups and under a host of other institutional arrangements. How well do such different institutions, or allocation mechanisms, perform? What is the optimal mechanism to reach a certain goal, such as social welfare or private profit? Is government regulation called for, and if so, how is it best designed?

These questions are difficult, particularly since information about individual preferences and available production technologies is usually dispersed among many actors who may use their private information to further their own interests. Mechanism design theory, initiated by Leonid Hurwicz and further developed by Eric Maskin and Roger Myerson, Has greatly   enhanced our understanding of the properties of optimal allocation mechanisms in such situations, accounting for individuals’ incentives and private information. The theory allows us to distinguish situations in which markets work well from those in which they do not. It has helped Economists identify efficient trading mechanisms, regulation schemes and voting procedures. Today, mechanism design theory plays a central role in many areas of economics and parts of political science.”

Ennuste (2003):


The paper uses the paradigms of the New Institutional Economics to quantify a linear optimal choice model as a way of designing perspective institutional clusters for a national economy. This model uses binary integer institutional choice variables and structural parameter values based on subjective probabilities collected from experts by calibration questionnaires.

The optimisation goal may be e.g. a high expected probability of stable national economic performance under socio-economic development credibility constraints, dependent on the realization of prospective significant events. The model may be useful as a complementary tool for the social design of the effective institutional structure, and especially for evaluation of the socially optimal values of co-ordinating shadow prices and implementing side-payments in the political institutional design game. We use the Estonian case as an example. The model variables and data calibration table illustrations are provided mainly to demonstrate the broad spectre of issues that may be involved in this analysis.

(N2) The quality of national public socio-economic knowledge structures

Ennuste (2008):

“…The narrative meta-synthetic deduction (Gu and Tang 2005) of rational conceptions for implementing mechanism building of the public social knowledge structure in the environment of the dynamic post-transformation society is extremely complicated.

First of all, all extant definitions of the structure have their drawbacks (Ramazzotti 2005), and more importantly, private information of the actors in this area is an intangible invisible asset of complex values: moral and material. So also are the preferences of the actors.

We have stressed in our discussions the importance to tackle these public social knowledge structures as active dynamic institutions: as the quality of these structure is not having only relationships with general social developments, but also directly, with future developments of the implementing mechanisms under this very study.

Consequently, the studies comprising more or less the whole system may give only very general results. Still, as this study has proved, this kind of wholeness analysis based on the meta-synthetic design (deductive implementation theoretic and inductive empirical-intuitional), might be highly justified, especially in the case of post-transformation situations. In these cases of rapid structural changes in many social areas the rational regulation/coordination of current beliefs, opinions, expectations, and learning structures is extremely important.

The above abstract discussion argued that the adequate socio-economic information structure implementing mechanisms design should have extremely complicated configuration:

* Complex and parallel coordination networks (e.g. governmental and nongovernmental)

* Complex coordinating instruments (e.g. material and moral)

* Complex coordinating principles (e.g. incentives and constraints)

* Moral coordination should contain for actors indicators of credibility in dissemination of messages (non-distortion, non-erroneous and clear and full disclosure), respectfulness in absorption and forwarding others messages, and aggregate indicator of reputation.

* Complex incentive and restriction mechanisms (e.g. may be based on complex number models).

* Complex sequentially interacting mechanisms should be preferred, especially in the field of reduction super-uncertainties (coordinating agents’ strategies), and also for reducing fundamental uncertainties.

The results of the survey revealed the importance of taking into consideration significant current idiosyncrasies of the societies under the study, e.g.:

* Types of political systems (e.g. partocratic democracy may be interested in disseminating dominantly populist messages to the public and at irrational closure of national statistics).

* Linguistic heterogeneities of the population (e.g. part of the newly arrived population may communicatively belong more or less to some other society).

* Weight of academic community in the society.

An extremely interesting phenomenon revealed by the survey and deductive speculations was that in the current Estonian context, enhancements and extensions of non-governmental soft (based mainly on moral indicators and self analyses) coordinating networks and institutions was by the bulk of experts, especially among academic people and high-ranking politicians, strongly supported. The noteworthy exceptions in this point have been the opinions of some governmental officials.

In general the study revealed that in the current Estonian context the reputation factors of the actors in the public socio-economic structure building should be more highly appreciated. Importantly, building the track for flexible mechanism changes and adaptation in Estonia in this area should aim toward measures, by adding complementary elements, not obstructing the work of the established credible respective institutions and introducing new uncertainties, and should aim at introducing first of all these policies which are connected with increasing institutional credibility. …” 

Kitano (2011) Capital controls and welfare:


This paper computes welfare levels under different degree of capital controls and compares them with the welfare level under perfect capital mobility by using the methodology of Schmitt-Grohé and Uribe (2007). We show that perfect capital mobility is not always optimal and that capital controls may enhance an economy’s welfare level. There exists an optimal degree of capital-account restriction that achieves a higher level of welfare than that under perfect capital mobility, if the economy has costly financial intermediaries. The results of our analysis imply that as the domestic financial intermediaries are less efficient, the government should impose stricter capital controls in the form of a tax on foreign borrowing.


(N3) Institutional changes first

Ostrom and BASURTO (2011) „Crafting analytical tools to study institutional change“:


Most powerful analytical tools used in the social sciences are well suited for studying static situations. Static and mechanistic analysis, however, is not adequate to understand the changing world in which we live. In order to adequately address the most pressing social and environmental challenges looming ahead, we need to develop analytical tools for analyzing dynamic situations – particularly institutional change. In this paper, we develop an analytical tool to study institutional change, more specifically, the evolution of rules and norms. We believe that in order for such an analytical tool to be useful to develop a general theory of institutional change, it needs to enable the analyst to concisely record the processes of change in multiple specific settings so that lessons from such settings can eventually be integrated into a more general predictive theory of change.

Our Discourse Memo is theoretically very much initiated by Cotton (2012) and specifically by the following claims considered there: „(1) the rich have better access to politicians than less-wealthy groups, (2) this access advantage makes the rich better off and skews policy in their favor, and (3) contribution limits can reduce the rich group advantage and result in less-skewed policy. … , which results in more evidence disclosure and better policy.”

Let us add here claims that from the modern heterodox macroeconomics position probably (1) “the rich” (tycoons, oligarchs, magnates, CEOs especially of banks etc, VIPs, etc or dependent think tanks etc – from macroeconomics point generally “laisser faire” and “small government” parlour) have also better access e.g. to national public press and formation of national public socio-economic knowledge space, and (2) from the point of political economics these access advantages probably are skewing national economic policies and national socio-economic knowledge structures in favour of certain interest groups, and (3) most probably are skewing national macroeconomics knowledge structures in favour to the direction sub-optimal short-termism and to  preference of the myopic microeconomics outdated market concepts and objectives in long-term development projections, e.g.: short-term growth v. sustainability, laisser faire v. taxes and audition, GDP v. NNI, stimulation v. intervention, forecasting v. projections, horizontal coordination v.   hierarchical, competitiveness v. wellbeing, consolidation v. expansion, unemployment v.  employment and fair economic equality, populist growth indicators v. economic potential, and so on – in directions of bad policies first of all from  the coordinated economic wellbeing union central player’s long-term views with primary priorities like convergence, sustainability, employment, alleviation of poverty etc.

 Cotton (2012) Pay-to-play politics: Informational lobbying and contribution limits when Money buys Access:


We develop a game theoretic model of informational lobbying between two interest groups and a politician, in which the politician can require political contributions in exchange for access. The analysis considers three claims: (1) the rich have better access to politicians than less-wealthy groups, (2) this access advantage makes the rich better off and skews policy in their favor, and (3) contribution limits can reduce the rich group advantage and result in less-skewed policy. We show that the rich do have better access, with the politician always offering access to the rich groups and only sometimes offering access to the less-wealthy group. This does not, however, mean that the rich group is better off or that policy is biased in its favor. The politician sets access fees to extract the greatest amount of rent from the political process. When only the rich group has access, its expected benefit from gaining access is fully offset by its payment to the politician. In this case, the less-wealthy interest group who is not targeted by the politician is better off. Contribution limits decrease the politician’s ability to extract rent, which improves the payoffs of rich interests and decreases politician payoffs. Finally, the paper presents a novel benefit of contribution limits: they can encourage the formation of lobby groups or the search for evidence, which results in more evidence disclosure and better policy.

And on the institutional  equilibrium also the paper: Guimarães and Sheedy (2012):


 Institutions that serve the interests of an elite are often cited as an important reason for poor economic performance. This paper builds a model of institutions that allocate resources and power to maximize the payoff of an elite, but where any group that exerts sufficient fighting effort can launch a rebellion that destroys the existing institutions. The rebels are then able to establish new institutions as a new elite, which will similarly face threats of rebellion. The paper analyses the economic consequences of the institutions that emerge as the equilibrium of this struggle for power. High levels of economic activity depend on protecting private property from expropriation, but the model predicts this can only be achieved if power is not as concentrated as the elite would like it to be, ex post. Power sharing endogenously enables the elite to act as a government committed to property rights, which would otherwise be time inconsistent. But sharing power entails sharing rents, so in equilibrium power is too concentrated, leading to inefficiently low investment.

National Reform Programme “ESTONIA 2020” (approved by the Government on 28 April 2011):

“ … A European Semester should encapsulate the surveillance cycle of budgetary and structural policies.

It would start early in the year with a horizontal review under which the European Council, based on analytical input from the Commission, would identify the main economic challenges facing the EU and the euro area and give strategic guidance on policies. Member States would take conclusions of this horizontal discussion into account when preparing their Stability and Convergence Programmes (SCPs) and National Reform Programmes (NRPs). SCPs and NRPs would be issued simultaneously, allowing the growth and fiscal impact of reforms to be reflected in the budgetary strategy and targets. Member States would also be encouraged, in full respect of national rules and procedures, to involve their national parliaments in this process before submission of the SCPs and NRPs for multilateral surveillance at the EU-level. The Council, based on the Commission’s assessment, would subsequently provide its assessment and guidance at a time when important budgetary decisions were still in a preparatory phase at the national level. In this context, the European Parliament should be appropriately engaged. … “

Estonian Government projection by 2020 pp 29-30 postulates:

17. Continuing the gradual reduction of taxes on labour and profits and to increase taxes on consumption and use of natural resources.

Greater taxation of wages and profit will limit economic growth more than the equivalent amount of taxation on consumption and use of the environment. For this reason, we must support at every level a shift in taxation from workforce (direct taxes) to taxation of  consumption and resource use (indirect taxes). Besides geographic location and reputation of the state, taxation is one of the most important factors that helps draw foreign direct investment to the country. Favourable taxes are the linchpin for positive investment decisions in cases where other prerequisites (basic infrastructure, education, security) are ensured to a degree comparable with other countries. Thus, as one measure to be established, a ceiling will be set on the pension insurance component of the social tax.

Efforts must be continued to harmonize indirect taxes that have a significant impact on the functioning of the EU internal market and to abolish exceptions in the EU. Direct taxes and tax systems (rates) reflect every country’s specific and unique social and political choices, and thus the principle of freedom of choice of member states must remain in place in this regard.

Estonia must become the 28th tax system to support the uniform consolidated income tax base on condition that it will simplify the functioning of the entrepreneurial environment and that it is possible to maintain the current Estonian corporate income tax principles. Simplicity, transparency, low administrative costs are of key importance for Estonia in maintaining and increasing the competitiveness of the entrepreneurial environment.“

It is easy for us to see – by all standards of modern heterodox macroeconomics (synthesis of the evolutionary-, institutional-, Bayesian- etc macro theories e.g. Keynesian and Friedmanian doctrines etc) –  this section is completely skewed towards the interests of the richer Estonian stakeholders and this especially in the EU long-term context,  and based on first of all on myopic microeconomic  and populist outdated concepts e.g.:

Continuing the gradual reduction of taxes on … profits (sic! üe) and to increase taxes on consumption … “ –  a) profit tax in Estonia has been  already about dozen years annulled to zero (sic!) and so an absurdity in the macroeconomic context: unethical and not harmonized in the international competition on capital markets, and dysfunctional domestically as pushing capital out of domestic economy (http://statistika.eestipank.ee/?lng=et#listMenu/1232/treeMenu/MAKSEBIL_JA_INVPOS/145/436 ) and unfairly inflicting increasing labour taxes and inflation, and b) increase of taxes on consumption would first of all be hitting most severely population in poverty risk and material deprivation c) and this tax policy is macro economically almost certainly not sustainable as e.g. indirectly is stimulating outflows of capital and labour out of country, increasing domestic economic real inequality etc – and with great probability inflicting sub-optimal long-term development of the national economy.

And: “Estonia must become the 28th tax system to support the uniform consolidated income tax base on condition that it will simplify the functioning of the entrepreneurial environment and that it is possible to maintain the current Estonian corporate income tax principles.” – this statement is not only skewed but also logically fuzzy in the interests  investors and trying to perpetuate that the less-wealthy should pay for some public expenses connected with profit-making of the haves.

Most importantly:  the present current populist macroeconomic policy on the basis of distorted low quality national public knowledge space (dominated by myopic populist liberal microeconomics doctrines as “flat taxes and small government” and “domestic devaluation”) has in the recent years turned Estonian economy on the negative divergence trend in the EU27  comparison (Figure 1. p 3: Estonian GDP pc even in the decorative PPS currency in sigma convergence has taken downwards trend), and NB! there is a regrettable Figure 1. but myopically no word of responsible explanation about this significant dismal trend in this document. Probably a turn to un-sustainability has also taken place (recall as unbalanced amounts of capital and labour is flowing out of the domestic economy) –  and that all regardless of substantial grants from the EU budget. Probably the neglect to analyse   these most important negative tendencies become possible because in the Estonian administrative statistics lacks a clear-cut rubric like “Sustainability indicators”.

Most importantly: Projections like “Estonia 2020″, Europe 2020″ etc, and clusters of official statistical sustainability indicators must also contain information about macro-financial flows and stocks, human capital macro flows and stocks, FDI flows and stocks, different inflation indicators, relevant tax reforms time lines, poverty indicators etc.

 In this respect the central role in the ES should have the “in the process of giving strategic guidance on policies to the Member States when preparing their Stability and Convergence Programmes and National Reform Programmes. It may be claimed that this mechanism has been designed according to modern standards of the heterodox mainstream macroeconomics (especially Bayesian informational coordination mechanism with side-payments theories). But as such may be skewed and in conceptual conflict with most of peripheral Member States  national socio-economic managers and administrators interests and of  international banks and monopoles local interests (high inflation, tax paradise, low wages ect.), and most importantly in  contradiction of the national public knowledge spaces mainly formatted on outdated liberal microeconomics tenets.

Probably this information asymmetry phenomenon may hamper or already had impeded the optimal implementation of the European Semester coordinating game mechanisms – and perhaps something has to be urgently done/regulated first of all  in this mechanism  by Commission especially in the field of enhancing quality of macro  communication mechanisms and  improving quality of  national macro statistics (e.g. include sustainability indicators etc; and publish Member Countries comparative GDP growth rates – http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-15022012-AP/EN/2-15022012-AP-EN.PDF

Chang 2011. Institutions and economic development: theory, policy and history:


The article tries to advance our understanding of institutional economics by critically examining the currently dominant discourse on institutions and economic development. First, I argue that the discourse suffers from a number of theoretical problems – its neglect of the causality running from development to institutions, its inability to see the impossibility of a free market, and its belief that the freest market and the strongest protection of private property rights are best for economic development. Second, I point out that the supposed evidence showing the superiority of ‘liberalized’ institutions relies too much on cross-section econometric studies, which suffer from defective concepts, flawed measurements and heterogeneous samples. Finally, I argue that the currently dominant discourse on institutions and development has a poor understanding of changes in institutions themselves, which often makes it take unduly optimistic or pessimistic positions about the feasibility of institutional reform.


(N4) On socio-economic policy-strategy and institutions skewness

Ennuste (2007 Sept): On policy skewness angles measurement

“… 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.

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

coordinate, … and j is the angel of rotation of the agents announcement from economic truthfulness.  … “

Ennuste (2009) ”Estonian hyper-crisis lessons confirm importance of more effective high quality coordination/regulation and harmonisation: …” :  “….

First, For recovery of hyper-crisis perhaps Estonia shouldn’t all together rush to exit from the variety of significant, direct regulation mechanisms and instruments like fiscal stimulus and monetary relaxation, intervention policies etc, categorically. Perhaps it is not yet too late to ensure a proper sequencing of these instruments complementary to budget cuts, with the goal of preventing a hyper- unemployment (20%), massive euro loan21 bankruptcies of households and double-dip recession. This, first of all based on domestic recourses (e.g. from Bank of Estonia, State-bonds etc).

Second, Estonia should instantly rush to establish “harmonization” with the EU Commission regarding the amendment of the extant Maastricht inflation criterion: in present form it is methodologically defective, non-transparent, and with that may be cause irretrievable socio-economic and credibility losses for Estonia; and perhaps in the crisis situation, it may be rational for Brussels to move beyond a rigorous adherence to the whole stability and growth pact altogether (see also: Sapir 2009).

Third, reform of the Estonian tax system is probably necessary instantly: in the sense of harmonization of investment competition with member countries, for enhancement of Estonian socio-economic sustainability, lowering the risks of domestic capital flight without domestic taxing and avoiding worsening of the Estonian International investment position. And most importantly, presently there is a lack of coordination between income tax law and national pension law, etc. … ”


Bezemer, D. 2009a. „No One Saw This Coming”: Understanding Financial Crisis Through Accounting Models. Groningen University.

Boettke, Peter and Alexander Fink. 2011. Institutions first. – Journal of Institutional Economics. December 2011 7 : pp 499-504.

Chang, Ha-Joon. 2011. Institutions and economic development: theory, policy and history. – Journal of Institutional Economics. (2011), 7 : pp 473-498.

Changchen, L. and Yunfeng, L. 2010. Perfect Bayesian implementation when the planner is a player. – Journal of Mathematical Economics, 46, 400–404.

Cotton, Christopher. 2012. Pay-to-play politics: Informational lobbying and contribution limits when Money buys Access. – Journal of Public Economics Volume, 96, Issues 3–4, 369–386.

Ennuste, Ü. 1978.  A Theory of Decomposed Optimal Planning. „Valgus“, Tallinn, 223p.

Ennuste, Ü. 2003. A Linear Planning Analysis of Institutional Structure in the Economy. In: Ülo Ennuste and Lisa Wilder (eds.) Essays in Estonian Transformation Economics. Tallinn, 265-79: http://pdc.ceu.hu/archive/00001564/01/linear.PDF  

Ennuste, Ü. 2007. Dual-Market Transition in Estonia 1987-2006: Institutional Mechanism Analysis Approach. In: Europe after Historical Enlargement. The Proceedings of 5th Audentes Spring Conference May. 28 2007, Tallinn, 60-126: http://www.ies.ee/iesp/No3/

Ennuste, Ü. 2007 September. The speech: http://www.audentes.eu/public/Ennuste_Speech.pdf        

 Ennuste, Ü. 2008. Synthetic Conceptions of Implementing Mechanisms Design for Public Socio-Economic Information Structure: Illustrative Estonian Examples.  In: Socio-economic and institutional environment: harmonisation in the EU countries of Baltic Sea Rim. Institute for European Studies, Tallinn: Tallinn University of Technology, 9 –39: http://www.ies.ee/iesp/No4/Ennuste.pdf

Ennuste, Ü. 2009. Estonian hyper-crisis lessons confirm importance of more effective high quality coordination/regulation and harmonisation: Mechanism design theoretic approach. In: EUROPEAN UNION: CURRENT POLITICAL AND ECONOMIC ISSUES. Institute for European Studies TUT, 11-35:  http://www.ies.ee/iesp/No6/iesp_no6.pdf

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION. 2011. Regulation „on the prevention and correction of macroeconomic imbalances“: http://register.consilium.europa.eu/pdf/en/11/pe00/pe00031.en11.pdf

Friedman, M. 1962. Capitalism and Freedom. University of Chicago Press.

Guimarães, Bernardo and Kevin D. Sheedy. 2012.  A Model of Equilibrium Institutions. – http://www.cepr.org/pubs/new-dps/dplist.asp?dpno=8855.asp

HOLCOMBE, RANDALL G and CORTNEY S. RODET. 2012.  Rule of law and the size of governmentJournal of Institutional Economics / Volume 8 / Issue 01, pp 49 – 69.


Kitano, Shigeto. 2011. Capital controls and welfare. – Journal of Macroeconomics. Volume 33, Issue 4, December 2011, Pages 700–710.

McMillin, W. Douglas. 2012. Introduction to the “Has Macro Progressed?” Special Section – Journal of Macroeconomics, Vol 34, 1, P1.

National Reform Programme “ESTONIA 2020” (approved by the Government on 28 April 2011): http://ec.europa.eu/europe2020/pdf/nrp/nrp_estonia_en.pdf 

North, D. 1990. Institutions, Institutional Change and Economic Performance. Cambridge University Press.

Pryor, F. 2005: Market Economic Systems. – Journal of Comparative economics, 33, 1, 25-46.

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Ott, A.F. and U. Ennuste. 1996. Anxiety as a Consequence of Liberalization: an Analysis of Opinion Surveys in Estonia. – Social Science Journal, 33, 2, 149-164: http://www.ingentaconnect.com/content/els/03623319/     

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Related Publications

Bezemer, D. 2009b. Why some economists could see the crisis coming. FT September 7 2009.

Bowles, S. and Sung-Ha Hwang, S.H. 2008. Social preferences and public economics: Mechanism design when social preferences depend on incentives. – Journal of Public Economics, 1811-20.

Ennuste, Ü. and Rajasalu, T. 2002. Critical Probability of the EU Eastern Enlargement Project’s Institutional Failure: Aspects of Calibrated Economic Impacts of the Failure. In: Monitoring Preparations of Transition Countries for EU-Accession. 4th International Conference October 4-6, 2002 in Pärnu, Estonia, Institute for European Studies, Tallinn, 212-227.

Ennuste, Ü., Kein, A. and Rajasalu, T. 2006. Institutional Determinants of Convergence: Conceptual Framework and Estonian Socioeconomic Institutional Harmonization and Convergence with the EU. CERGEEI GDN No program project. 34. (http://www.cerge-ei.cz/pdf/gdn/RRCII_34_paper_01.pdf)

Giles, C. 2009. OECD urges rich countries to strive for flexibility. The Economist, March 3 2009.

Kukk, K. 2005. Economic Losses. In: White Paper – (Ed. Vello Salo), Tallinn, 12-75.

Ramazzotti, P. 2005. Knowledge and Macro-Coordination. Google.

Rasmussen, P. 2009. Sustainable growth requires greater regulation – Letter to the Editor of the FT July 2 2009.

Rosser, J. 2007. The Rise and Fall of Catastrophe Theory Applications in Economics: Was the Baby Thrown out with the Bathwater? – Journal of Economic Dynamics & Control, 31, 3255-80.

Skidelsky, R. 2009. Economists clash on shifting sands. FT June 9 2009.

Vanhanen, M. 2009. Europe will need to raise taxes in harmony. FT June 17 2009.

Vanberg, V. 2005. Markets and States: The Perspective of Constitutional Political Economy. – Journal of Institutional Economy, 1, 23-49.

The whiff of contagion”. 2009. The Economist. Feb 26th 2009. http://www.economist.com/world/europe/displaystory.cfm?story_id=13184594

Wallis, J. 2006. Evaluating Economic Theories of NPOs: a Case Study New Directions for Socio-Economics – The Journal of Socio-economics, 35, 959-979.

Wickens, M. 2009. Interpretation is wrong, not theory. FT July 23 2009.


March 21, 2012 - Posted by | Uncategorized


  1. Hi, I just stopped by to visit your website and thought I’d say I had a great visit.

    Comment by how to study | April 10, 2012 | Reply

  2. Anbei schicke ich Dir einige Bemerkungen zum sehr interessanten und komplexen Beitrag von Professor Ennuste. Wie immer bei solchen Themen, waere es zweckmaessig einige zu lange Saetze zu kürzen, bzw. in mehrere Saetze teilen. Dies könnte die Aufgabe des Redakteurs aber auch des Autors sein.

    Die Bemerkungen habe ich auf Englisch formuliert, da der Text selbst auch in englischer Sprache geschrieben wurde.

    Abstracts, second paragraph. „Lisbon Strategy” and not „Lisbon Agenda”.
    Capacity for institutional change and the efficiency of institution-building is closely related to the socio-economic development level of the given country. This has been a long discussion between the World Bank and the European Union concerning the strategy to be offered to the Western Balkan countries. What should have priority: institution-building or sustainable and rapid economic development, considering the current level of economic development of these countries.
    There is a growing gap between political and economic rationality. The former, at least in democratic systems, is defined by the four-year cycle of elections. However, most fundamental economic problems can only be remedied (or just managed) in a much longer period (such as reforms of the pension, health care, education system, public administration, etc.). Far-reaching reforms used to produce more and not less economic (and social) costs in the short term, while longer term and net benefits regularly need a (much) longer time than a political cycle used to last.
    Economic institutions are not static, for they have to be time by time adjusted to rapidly changing socio-economic, political and mental (!) environment. Economic cost-benefit analysis has to be incorporated into a comprehensive package that includes social and political costs and benefits at the same time. In this context, pure mathematical formula (equations) are even less helpful than in restricted economic analyses.
    The weight of the academic community is important. However, more importance than its „physical” presence has to be attributed to its level of knowledge, openness to other opinions and future-oriented mentality.
    Small and open economies have to base their sustainable growth/development on export competitiveness and mainly export-oriented domestic investments. Private consumption (domestic demand)-led growth cannot create sustainable growth and leads to serious financial and debt crises.
    Any attempt of the „old” EU members to restrict competition coming from the „new” member countries (e.g. harmonization of taxes, social standards, etc.) would deteriorate the international competitiveness of the European integration. Not less importantly it would accumulate economic and social tensions within the integration that have to be managed in order to keep the critical minimum of „cohesion”. Moreover, such attempts are unable to face the increasing global competition generated by extraEU economies.

    Mit herzlichem Gruss aus Budapest

    András Inotai

    Comment by Ülo Ennuste | May 4, 2012 | Reply

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