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Sunk costs have zero value

Published on 03 May 2015
Updated on 05 April 2024

(An elegy on the Greek “problem”)

But when he came to himself he said, “How many hired servants of my father’s have bread enough to spare, and I’m dying with hunger! I will get up and go to my father, and will tell him, ‘Father, I have sinned against heaven, and in your sight. I am no more worthy to be called your son. Make me as one of your hired servants.'”

He arose and came to his father. But while he was still far off, his father saw him, and was moved with compassion, and ran towards him, and fell on his neck, and kissed him.

— Luke 15:17–20

As I write, the last scenes of the Greek drama are unfolding. Writes Greece’s Finance Minister: “Three months of negotiations between the Greek government and our European and international partners have brought about much convergence on the steps needed to overcome years of economic crisis and to bring about sustained recovery in Greece. But they have not yet produced a deal. Why?”[1]

From what I can see, the basic conflict remains unresolved. It is the age-old conflict between accountants and economists. For an economist, sunk costs have zero value – akin to spilled milk. The past is economically dead – what counts is what the economy can produce in the future. It is a forward-looking perspective. For an accountant, the past is the only thing that counts: debts need repaying or bankruptcy looms. The future is conditional on the past.

A sustainable economy needs both economists and accountants. How to reconcile these opposites would show the negotiator’s skill. Meanwhile…

Whitewashing the offenders

In the never-ending investigation of the “Greek problem,” one notes how gingerly pundits walk around the elephant in the room. They studiously avoid any criticism of European institutions. In my opinion, the structural problems are to a large extent located there. I see neither political nor popular indignation in this regard.

  • A common currency without a common fiscal policy. An internal market needs a common currency – true. Monetary and fiscal policies, however, are indissoluble. For historical reasons,[2] the Maastricht Treaty skirted the issue, replacing it with pledges by sovereign countries strictly to follow guidelines of fiscal probity. These pledges were more honored in the breach than the observance.
  • Inadequate surveillance criteria. The criteria of fiscal probity relied on “good times are here to stay,” despite the many unforeseen shocks that preceded the creation of the € and should have been a warning. Of course, the future is uncertain. To ignore intrinsic volatility of a multitude of economies is a recipe for disaster, particularly if there is no mechanism for dealing materially, rather than formally, with contingencies.
  • Institutionalized “principal-agent” problem. Principals and agents are bound by a contract that, in theory, aligns the interests of both on the same objective. One may trust agents as long as this condition eventuates. Agents, however, tend to exploit the principal’s dispositif[3] to their advantage. Mayhem ensues. The EU Treaties are a form of “principal-agent contract” – except that agents collectively act as principals. Consequently, the contract tends to be weak, ambiguous, and prone to inadequate or formlaic rather than substantive surveillance.

More fundamentally, the much touted “separation of goals and means” enshrined in the “subsidiarity principle” may predispose the system to fail. For the “center” sets idealistic (read unrealistic) goals in ignorance of the complex context. The notion of “sovereignty” protecting the state from interference from above hampers feedback from the member state. Half in jest, I venture that the EU Commission is constitutionally incompetent, for it never faces the consequences of its decisions, rules, and regulations in the field.

  • Weak oversight. The EU Commission was to act as a “rating agency” for the participant countries. With states successfully holding up the “sovereignty” shield against substantive inquisitiveness, the surveillance is weak.[4] In addition, though the EU Commission had an obligation to initiate corrective mechanisms, the states had ultimate powers. The slackness of the EU Commission reflected its reading of the political, rather than the economic context. Still, signals were there for those who wanted to note them. [5]
  • Implicit guarantees. The role of the EU as collective “rating agency” provided an implicit guarantee to creditors. The vague character of the surveillance allowed creditors to charge Greece added “risk premiums,” while refusing to accept the loss as it eventauted. The system is perverse.

I could go on. Greece reacted rationally to the EU dispositif. It played the game – and more. Much more, as we all know, for there was much corruption, waste, and concealment. A culture of hyperbole has not helped.[6]

Punishment of the innocent

The impression from a cursory visit to its capital and surroundings is a mix of widespread decay coupled with wasted investment. It will be a long and painful slog to a sustainable recovery.


(A house in central Athens)

Someone has to pick up the tab for the Greek “default.[7]” It will be Greek taxpayers, who will bear the burden with debt repayment, structural reforms (read unemployment), and decline of consumption. One hopes that such measures will make room for much-needed maintenance of existing capital as well as productive investment.

One of the unintended effects of the “four freedoms” underlying the EU Treaties is that capital, capitalists, and wealth are free to move away.[8] Residents are left to foot the bill through taxes. If the exodus has not happened, it is going to happen soon, as the consequences of the crisis unravel. The people who least profited from past profligacy, and are least able to make the sustained effort, will bear the brunt.

As an economist, I tend to side with those who look at the context in order to move forward pragmatically. It is not going to be an easy task. The many independent Greek cities of yore, living off international commerce, were soon gathered under the umbrella of the Roman state. These cities remained part of one or the other larger political entity until a precarious independence in 1821. The area has struggled to become a sustainable economy ever since. Wars and political chaos have repeatedly devastated the country. Even the EU was unable to transform the country.

Starting from such difficult premises, one must show compassionate patience, nay endurance. The unseemly blame game, however, is inappropriate, and it gets in the way of moving forward.


[1] https://wp.me/p1c6I1-21h

[2] Over-simplifying, the € was the price Germany paid for its reunification. France wanted the control of Europe’s monetary policy, but did not want to abandon fiscal sovereignty.

[3] Dispositif is a term used by the French intellectual Michel Foucault, generally to refer to the various institutional, physical, and administrative mechanisms and knowledge structures which enhance and maintain the exercise of power within the social body. In its vagueness the term is useful for describing the network – irrespective of its origin, intent, or consistency.

[4] Though the Greek problem (but also that of other countries) was long in coming and well-known to the EU Commission, no alarm signals arose before the crisis. There has been no reprimand for slackness.

[5] For an assessment of VAT-avoidance see e.g. the EU 2009 publication https://europa.eu/rapid/press-release_IP-09-1655_en.htm

[6] See e.g. Nikos DIMOU (2013): On the unhappiness of being Greek. Zero Books, Washington DC.

[7] The specifics of the default (haircut? Withdrawal from the €?) is still open. As the deadline of 9 May 2015 approaches, temperature is rising in Athens to 36°C – even the weather is putting the heat on the Greeks.

[8] It does not help that Greeks are culturally inclined to migrate, create colonies, and entertain an arms-length relationship with the fatherland. In this, they seem to differ from Israel and Lebanon. But I may be wrong.

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