Ülo Ennuste Economics

papers and articles in wordpress

Remark 2.IX 14

Research Remark (Draft 2.IX 14)

Towards special methodical problems of macro-optimal socio-cybernetic international economic sanctioning coordination modelling:  Introductory remarks on preliminary postulates and conjectures

“the reason sanctions are popular is not that they are known  to be effective, but “that there is nothing else between words and military action if you want to bring  pressure upon a government”                                                                                                               Jeremy Greenstock

             “Methods of conflict,” he wrote, have changed, and now involve “the broad use of political, economic, informational, humanitarian and other non-military measures”. All of this, he said, could be supplemented by firing up the local populace as a fifth column and by “concealed” armed forces.

 

Valery Gerasimov, the chief of  Russia’s general staff, FT.com 29.VIII 14 

Introductory remarks                  

In the economic literature as one of the first example of economic international sanctions is provided by the measures taken by the U.K. government in the Rhodesia independence conflict (The Penguin Dictionary of Economics 1978 p174). According http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1007387 the EU has had in the previous decades an ample chronology of international sanctions and dominantly with low efficiency and abortive – probably due to amateur myopic and  low macro-cybernetic theoretical base missing adequate risk-considerations.

See also for the current publications  in http://en.wikipedia.org/wiki/Economic_sanctions – and recent definitions e.g.:

Economic sanctions are domestic penalties applied by one country (or group of countries) on another country (or group of countries). Economic sanctions may include various forms of trade barriers and restrictions on financial transactions. Economic sanctions are not necessarily imposed because of economic circumstances — they may also be imposed for a variety of political and social issues.[citation needed] Economic sanctions can be used for achieving domestic political gain.[1][2][3]

Actually the latest recent example for the EU28 is provided by the Third Round measures presently implemented in unison as partners by the EU and the USA in the camp against Russian Federation in the case of the Russian aggression in the South-East Ukraine:  http://europa.eu/newsroom/highlights/special-coverage/eu_sanctions/index_en.htm

As this sanctioning seems to develop as a many-stage process (the preparation of the next round was announced by European Council on 30 August 2014)  – there may be still time to analyse the structure of the sanctioning process mechanism design in an economic union with sovereign national member states – theoretically in the spectre of modern stochastic coordinated  game theoretic and institutional economic etc methods (Appendix A) and make corrective suggestions.

Modelling remarks

Theoretically the most complicated problem in planning of collective sanctions in the EU context in this Third Round – is the central optimal coordination of the defensive/deterrent economic sanction measures taken by the imposing EU member states – as these penalty measures projected by the imposing countries against transgressing third national economy – are as a rule hurting the member states economies as well – and – in different stochastic degrees directly and indirectly. First of all via counter attacks by transgressor in many ways: political, economic, military etc (at least in this conflict http://www.ft.com/intl/cms/s/0/ea5e82fa-2e0c-11e4-b760-00144feabdc0.html?siteedition=intl#axzz3BlPGU7Av ). Thus from the cyber-economics perspective the adequate optimization criterion has to be complex: e.g.: real economic risk axis, and complementary imaginary political risk axis (see introductory notes about optimisation on the complex plain e.g.: http://www.audentes.eu/public/Ennuste_Speech.pdf ).

Additionally complications in this model may come into game via third country fuzzy logic and dictators’ infamous moral-hazards (http://www.ft.com/intl/cms/s/0/6512d3c8-2955-11e4-8b81-00144feabdc0.html?siteedition=intl#axzz3BNjbI9Gu ). And most importantly: the complexity of the problems increases as with the sanctions to the antagonist the coalition union has to introduce complementary domestic economic policies and mechanisms for the minimization the losses inflicted to the national member economies from the counter-reactions of the antagonist – and mechanisms for truth-telling in the coalition. Alas in the text of the http://europa.eu/newsroom/highlights/special-coverage/eu_sanctions/index_en.htm – we can openly not find a smallest measures by EU to organize complementary domestic counter-strategies coordination mechanisms, institutions, crisis committees etc.

It seems these complex circumstances make hardly a pragmatic normative coordination quantitative modelling too-bad (see e.g.: Jonathan Schlefer. 2012. The Assumptions Economist Make. Harvard University Press): at least it may clarify lines of reasoning – e.g. why in this kind of complex uncertainties a MinMax expected loss criteria may be most adequate – and how complex plane optimization may give opportunity to measure the angels/slopes between alternative vector-risk criterion (economic and political) strategies – and the missing the point that implementation of international economic sanctions has to be beforehand prepared domestically especially in the energy security etc.

Basic extant modern evolutionary heterodox macro-socio-economics and -cybernetics (see e.g.: Lindau Nobel Laureate Meetings 5th Economic Sciences 19-23 August 2014 Abstracts pp 24-44 – http://mediatheque.lindau-nobel.org/videos/33963/joseph-stiglitz/meeting-2014-eco – alas there are missing financial theories and international trade theories by Krugman ect) provides for this special example at least a three-postulate pillar – probably sufficient methodical framework for modelling about an optimal coordination of international sanctions for the group of countries in the conditions of complex uncertainties:

First is the consideration of uncertainties and risks in the hierarchical coordination  – and these in most complicated stochastic  cases  as e.g. Donald Rumsfeld’s  “known unknowns”, Bayesian etc (as examples see in*) –  mixed strategies and scenario approaches  in many stages game theoretic decentralized/democratic coordinated equilibrium mechanisms.

Second is modelling of coordinated optimization of socio-economic institutional/mechanism structural changes and designs**.

Third is consideration of changes in the national knowledge structures and consideration connected with communication moral-hazard risks and moral coordination***.

All the various contributions of these methodical tools to the implementation by the agents for optimal strategies and institutional designs in the case of antagonistic coordinated games are presented in the above quoted Papers containing also relevant significant classical References.

 

Preliminary conjectures:

First is that in the case of financial-economic union  the optimal sanctioning of the third national  economy – the specific all-union sanctioning tax for member states (as in the ESM example) should be introduced for solidarity compensation mechanism (analogous to e.g. ESM mechanism and European Semester mechanism etc) of  the union members who suffer to losses at the most in the economic sanction war – war in the defence against the escalation of political and armed aggression.

Second is that besides other common real factors as international trade losses in the sanction wars  – also the financial and capital losses should be taken into consideration – as well losses/gains in the imaginary international credibility capitals of national societies  and losses in the respectability of  their political and knowledge  structures.

Third and most importantly: strict material and moral penalties and restrictions should be implemented to the institutions/agents distorting internationally national knowledge structures  – authorized under the auspices of the third transgression state  – resident agents or not: as these kind of distortions prolong the duration of  economic wars with relevant damages to the probabilities of nationals sustainability ***.

Complex modelling involving indirect relations and feed-backs may produce counter-intuitive conclusions. E.g. from the aspect of impairment of the Russian economy the “Mistral” deal may with grate probably be justified – and – in the Estonian example financial restrictions on some Russian capital founded banks may probably give new opportunities to improve national balance of payments and international investment position – or – that is a good innovation in the borderline science parks develop Russian camps etc.

For the qualitative measurement of effectiveness of the implied sanctions in the short term: a) the speed of nationals’ statistical production should be enhanced on the level of present ICT level b) national official statistical publications have to be made more transparent and ample and open for the public. E.g.: Estonian Statistical Yearbooks do not contain estimations of assets of households (because administrators here are regularly not making difference between income and wealth/capital (see e.g.: Thomas Piketty. 2014. Capital in the twenty-first century. London: Belknap Press of Harvard University Press.)

That makes for instance cumbersome quick assessment of national households property losses via gas supply cuts by  transgressor  –  Appendix B) c) especially national central banks must openly publish international balances of payments also in the country by country format etc. BTW considering complex uncertainties (e.g. fuzzy logic of the antagonistic country) it is important to have in mind by the effectiveness assessments that in these conditions the diversity of sanctions is as important as the generally moderate degrees of sanctions – and open possibilities for further bargains.

Last but not least: A key part of the answer is how to minimise maximum losses for the imposing cooperative camp – is to prepare beforehand favourable national real and information environments. To make beforehand necessary adjustment processes in foreign trade and foreign financial sectors first of all with concurrent investments. But also in the national information cyber-security and national statistical speed and credibility and sufficient completeness fields – and the most cumbersome favourable preparation in the national knowledge and political structures for the adequate cooperative coordination.

 

References

*) Ennuste, Ü. 1989. Some Models of Stochastic Planning Mechanisms. – Finnish Economic Papers, 2, : http://econpapers.repec.org/article/fepjournl/v_3a2_3ay_3a1989_3ai_3a2_3ap_3a116-124.htm

NB! In this Paper cooperative/collective/coalition coordinated game was termed as „socialist“.

And

International Game Theory Review, December 2008, Vol. 10, No. 04 : pp. 539-564

THE AGENCIES METHOD FOR MODELING COALITIONS AND COOPERATION IN GAMES

JOHN F. NASH JR.

(doi: 10.1142/S0219198908002084)

And

John F. Nash Jr.
Artificial Intelligence and Cooperative Games
Session: Thursday, 2014 21 August, 11.30 hrs – In: http://mediatheque.lindau-nobel.org/videos/33963/joseph-stiglitz/meeting-2014-eco

Abstract
Recently I have been researching in the area of “cooperative games” with the
stimulation of an idea which effectively enables the theoretical reduction of
a cooperative game to a non-cooperative game of a special sort or variety,
specifically the sort of game which arises when several players COULD do
well, playing among themselves with legitimate “game moves”, but where,
if they were not given some mechanism that would tend to induce them to
take game actions relatively favourable for the joint welfare of all of them together,
then they might naturally behave so badly in relation their possible
mutual best interests that that would be like the simple non-cooperative
equilibrium in a prisoners’ dilemma game.
One of the observations that can be made here is that a human player playing
in a game and strictly following a completely detailed game strategy
becomes equivalent to a robot and behaves as if he were an “artificial intelligence”.
So we have the possibility of gaining understanding of “cooperative games”
through gaining understanding of how a good class of model “artificial intelligences”
might naturally play them.
The class of cooperative games introduced by Von Neumann and Morgenstern
in their book still provides a good and stimulating challenge to game
theorists.
Perhaps nothing like a set of points, or a class of sets of points, nor sometimes
any single point would be the ideal concept that we would like to find
and appreciate relating to these games (which have transferable utility (like
a conveniently transferable utility) usable as businesses use money). But
there is the natural psychology to appreciate something that might seem
comparable to the solution of a classical “chess problem”.
I have myself been involved with studies which have considered games of
three players that are DEFINED by a “characteristic function” (and which
correspondingly involve “transferable utility”). Such a basic type of three person
game is completely defined by its “characteristic function” specifying
v(0)=0, v(1)=k1, v(2)=k2, v(3)=k3, v(1,2)=j12, v(1,3)=j13, v(2,3)=j23, and
v(1,2,3)=m123. (And usually the characteristic function is presumed to be
“super-additive”.)
My first involvement in these studies led to a program of calculations which
developed as sponsored research and led to a publication in “The International
Game Theory Review”. An experimental games study deriving from
that work attempts to study cooperative games and cooperation in games
through the device of “the method of agencies” which provides a standard
means for the formation of effective coalitions and the enabling of cooperation.

**)  Ennuste, Ü. 2003. A Linear Planning Analysis of Institutional Structure in the Economy:  http://pdc.ceu.hu/archive/00001564/01/linear.PDF

And

Lindau Abstracts p38:

 

Maskin, Mirrlees, Myerson

Strategic Behavior, Incentives, and Mechanism Design

 

Economics has always been concerned with incentives. For a long time,

however, most formal analyses of incentive issues were limited to the behavior

of people or corporations in markets where the institutional environment

was given. Since the 1960s, our understanding of incentives and

incentive problems has been revolutionized by research contributions that

identified asymmetric information and strategic interdependence as root

causes of incentive problems and provided fundamental insights about the

scope and the limits for dealing with these problems by institution design.

The importance of this research was recognized by the award of the Prize

in 1996 to Sir James Mirrlees and William Vickrey for their “fundamental

contributions to the economic theory of incentives under asymmetric information”

and in 2007 to Leonid Hurwicz, Eric Maskin, and Roger Myerson

“for having laid the foundations of mechanism design theory”.  …

***) 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. Tallinn University of Technology, 9 – 39: http://www.ies.ee/iesp/No4/Ennuste.pdf

And

http://www.audentes.eu/public/Ennuste_Speech.pdf

APPENDIX A: Technical Remarks

Table (Draft 31.VIII 14): The institutional mechanism structure of the players

Sanctioning Alliance Coordination  Symposium*(SCS) Transgressor/ Antagonist Third  Country Significant Fourth Countries Known unknowns Unknown known and unknowns
EU                                            US        RF          CH  BRICS    etc Natural abnormalities like Iceland volcanic eruptions etc  ………….
Symposium  of              28Memberstat (SEU)        Non-coordinated antagonist              Non-coordinated
Member stat’s  Coordinative Symposiums (MCS) e.g.: (EEMCS) etc

 

*Symposium – code name of the coordinative mechanisms/institutions – implementing material and moral side-payments***.

The risk-game theoretic coordinated decomposed equilibrium solution is based on the optimal mechanisms optimizing coalition members’ losses considering economic and political losses risks: a) self-inflicted directly by sanction strategies (e.g.: curtailing imports from adversary) b) losses/gains inflicted directly by side-payments (material and moral) in the situation of optimal all-coalition collective sanction strategies c) loss risks indirectly by counter-attacks d) significant economic losses may be in the national (domestic and in the other countries) capital (private and households) and in GDP real genuine volume and Actual Individual Consumption etc , in economic potential and probable sustainability, in labour force, etc – and moral risk-losses may be members’ international political and economic and military credibility ratings etc.

 

APPENDIX B (Draft 3.IX 14 to https://uloennuste.wordpress.com/2014/08/31/remark-31-viii-14/):

Macro-economic conjecturable hypotheses of the Estonian national losses and damages connected with Russian aggressions in 2014-5(??) and with the EU sanctions

„Sanctions are still an important tool, … Only sanctions that bring the costs of Putin’s war home can have an impact now.”

Garry Kasparov (1)

H.1.: The Russian military territorial aggression in East-Ukraine will be liquidated mainly by the Ukraine military activities – and by the complementary US and EU collective Sanctions + material aid (Edward Lucas  and Anne Appelbaum 2). There will not follow Russian military territorial aggression or occupation into Baltic States significantly due quoted S+ as the necessary factor.

P.S.: Economical estimates of the Estonian national losses via Russian Occupation 1940-91 have reached ca kr 1(+/-1/2) trillion (Kalev Kukk 3) – about 30 times current Estonian Net National Income (NNI): meaning that if the S+ may diminish probability of occupation risks a couple of percentage points – the expected national gain economically may reach € 40(+/-4) – 60(+/-6) B. (estimated by means of analogy with the 1940-91 occupation

H.2.: In the case of the prevention of the Russian military intervention against Baltic States the Estonian national sub-regional losses risks connected with Russia-Ukraine War 2014-5(??) may be estimated by following main big-risk components:

a) Russian direct retaliatory counter sanctions against Estonia as to the EU member state – inflicting losses to the volume of the ΔNNI (e.g.: via bilateral trade – my present preliminary conjectural estimate of this potential risk may be in the volume of € 0,4 B. p.a. (here 0,4 notes an approximate standard numeral 0,4(+/-0,05) – including losses of complete cut-off Russian gas supply – presently the single gas supply for Baltic states – Edward Lucas 3); plus damages to Estonian Domestic Assets – ΔDA (e.g.: complete gas cuts may have potential risk to nullify completely the value of entire Estonian national gas-system infrastructure: the damage to the domestic capital may be several billions + investments to ground replacement infrastructure etc)

b) The Estonian possible losses inflicted by the EU’s collectively vs. Russia implemented trade and financial/banking and travel sanctions (these possibly almost certainly € 0,2- 0,4 B., and probably belong at least partially to compensations by Commission)

c) Possible damages to the international credibility of the Estonian business and investment climate and sustainability – and – political security risks of intensification of ethnic conflicts (Ott and Ennuste 4) and stirring up irredentist fifth columns (“green men”) in the Estonian ample Russian speaking enclaves as in March 2009 in Tallinn (damages have not been officially statistically not yet estimated) etc.

And last but not least: This sanction war is almost certainly stirring up propaganda war between the Baltic States and the Kremlin – and additional poisoning of national knowledge spaces especially in the Baltic Russian speaking Diasporas – alas Baltic nationals knowledge structures mechanisms are not yet on the level of the Kremlin think tanks dialectical fuzziness – and additional development/sustainability losses at least for Estonia are almost certainly on the horizon (5).

P.S.: Probably it seems too early to summarize quantitatively and finally economically provisional estimates of Estonian expected possible national losses and damages risks – connected with the EU collective Sanctions against RF: but without any doubt these are magnitudes smaller as maybe rationally expected without these notorious Sanctions.

1) http://time.com/3227869/garry-kasparov-its-a-war-stupid/

2) https://docs.google.com/document/d/1nLdiU4jRMYlVgtrX6JXs4L8vxwlN2NpVh8ndUgbYH94/edit

Edward Lucas : “A final footnote: whereas Russia once regarded the collapse of the Soviet Union as a liberation from communism, the regime there now pushes the line, with increasing success, that it was a humiliating geopolitical defeat. That is not only factually false; it is also a tragedy for the Russian people. They overthrew the Soviet Union, under which they had suffered more than anyone else. But they have had the fruits of victory snatched away by the kleptocratic ex-KGB regime. The bread and circuses it offers are little consolation for the prize that Russians have lost: a country governed by law, freed from the shadows of empire and totalitarianism, and at peace with itself and its neighbours.”

and

http://www.washingtonpost.com/opinions/anne-applebaum-war-in-europe-is-not-a-hysterical-  idea/2014/08/29/815f29d4-2f93-11e4-bb9b-997ae96fad33_story.html

3) “The White Book. Losses Inflicted on the Estonian Nation by Occupation Regimes 1940-1991“. State Committee on the Investigation into Repression Policy of Occupation, Estonian Encyclopaedia Publishers, Tallinn 2005 pp 141-174:

http://digar.nlib.ee/digar/show/?id=8192

4) Ott, A.F. and Ennuste, U. 1996. Anxiety as a Consequence of Liberalization: an Analysis of Opinion Surveys in Estonia. – Social Science Journal, 33, 2, 149-164:

http://www.sciencedirect.com/science/article/p

5) http://www.ies.ee/iesp/No6/iesp_no6.pdf

 

 

 

 

August 31, 2014 - Posted by | Uncategorized

No comments yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: