The Greek leader Odysseus ordered sailors to tie him to the mast so he could resist the song of the sirens. This kind of commitment strategy makes it costly to deviate from a policy one might not have the will to execute.
Such strategies are essential to modern economic life. Households and businesses are able to engage in complex transactions because they are able to restrict their future behaviour. They can do so by investing in their reputation; they incur contractual obligations that put them under the jurisdiction of the courts. The establishment of effective mechanisms that restrict opportunism and allow costly commitments may be the most important distinction between rich and poor countries.
Commitment strategies have also played a key role in the development of modern macroeconomic theory and policy. The paradigm of rational expectations supposes that companies and households have the same insights into the future as the government itself. If all agents use this shared knowledge as a basis of action, government policies should lay out sustainable paths for fiscal and monetary growth and thus enable everyone to make plans on a consistent basis. Such thinking has provided a rationale for central bank independence, inflation targeting and for an approach to fiscal policy that involves binding debt and deficit targets. The regulatory “fine tuning” of taxes and expenditures that was characteristic of the Keynesian hegemony has been abandoned.
There is a sensible core idea here: policies need to be judged by their effects on expectations as well as their immediate consequences, and such effects may counter, or amplify, the initial impact. When elevated into dogma, however, such thinking becomes fanciful: influential German economists appear to believe that if only the Greek and other European governments would tie themselves to the mast of fiscal rectitude, wages, prices and securities markets across the eurozone would quickly adjust to a new long-term equilibrium. The weak-willed would thus escape both the Scylla of bond default and the Charybdis of high unemployment.
The crowds in Syntagma Square convey a different message. People do act on their expectations about the future, but these are conditioned by their current experience. In 2010 the British government bravely hoped that setting a clear path to debt and deficit reduction would lead to rapid recovery. This proved to be wishful thinking as companies and households projected austerity into the future. The Greeks, facing a much gloomier outlook, are disconsolate and angry.
The very power that makes government an effective enforcer of the commitments of other people renders it incapable of enforcing its own promises. We might ponder the sad experience of Churchill Mining. This little British company picked up some abandoned licences in Indonesia’s Kalamantan, discovered what may be one of the world’s largest coal reserves, and then found its licences had been revoked. Such behaviour is not in the long-term interests of governments. But we see it even in countries with an effective rule of law. Exploration companies expect that the rules of the game will be changed to their disadvantage if their activities are successful. Given that expectation, it is foolish for the governments concerned not to fulfil it.
Treaties and constitutions are a means of limiting the ability of states to sacrifice long-term benefits to expediency. But not of eliminating it. Central banks are independent only up to a point: debt and inflation targets are set aside when needs must. Fudged statistics and ambiguous forms of words are found to reconcile today’s actions with yesterday’s pledges: Theresa May, home secretary, is in Jordan to find a formula that appears to make the deportation of extremists and terrorist suspects compatible with their human rights.
Governments will in the end always put voters ahead of prior commitments or external obligations. That democratic imperative has costs and benefits – but, overall, the benefits of popular accountability far exceed the cost. The Odyssey taught humanity the dangers of hubris and the need for flexible responses to interminable and unpredictable setbacks. If Europe’s economists and policymakers did not learn these lessons from the ancient Greeks, they must learn them from the modern ones.