This is not the first time thousands of classified documents have been “liberated,” revealing to a stunned public how their government has waged a concerted war of disinformation against them for the purposes of bending their will to the demands of a pointless war: a war on the altar of which the deceived public are being asked ritually to sacrifice their children, husbands, wives, friends. This is not the first time that the establishment has united in its condemnation of the brave “leaker” for “putting the lives of servicemen and women at risk.” It is not even the first time that the bearer of awful truths has been maligned, persecuted, imprisoned.

In this sense, nothing much has changed. Except, of course, that, in the era of the Internet, WikiLeaks can flood the world, by a few keystrokes on a keyboard, with the classified documents taken out of their well-guarded vaults on a tiny USB stick. Speed and volume count. Nevertheless, this generation of truth seekers, gallantly fighting for their own right to know, still owe their precursors a debt of gratitude for paving the way for them at a time when leaking meant hard physical labor (endless nights at photocopiers) which put “subversive” insiders at far greater risks.

The most celebrated precursor to WikiLeaks is, of course, none other than Harvard-educated economist Daniel Ellsberg. His tale is one of uncommon courage, intellectual honesty, and scientific brilliance with which, perhaps unbeknownst even to himself, he hit upon an analytical and empirical result which ought to have put the spanner in the works of neoliberal economics.

History will remember Ellsberg as an establishment figure, the Cold Warrior scientist and policy maker whose conscience rose up against his own endeavors and who performed a remarkable act of defiance: one that effectively undermined the moral and military case for continuing the Vietnam War. Almost everyone remembers the infamous Pentagon Papers that Ellsberg leaked to the press, revealing the truth that the carnage called the Vietnam War was not only an unwinnable war but that, remarkably, the powers that were had known that for years and yet continued to send young soldiers to Indochina to kill and get killed. What is, however, less known is that Ellsberg also had a habit of surreptitiously undermining established falsities in another crucial battleground.

The Subversive Experiment

Ellsberg began his career as a RAND scientist who spent time studying decision theory: the mathematical models whose aim is to establish the rules of rational choices in the face of uncertainty. The Pentagon cared about these models as it wanted advice on when to strike, how to pre-empt an enemy, how to plan nuclear attacks, etc. At that time, some of the best and brightest worked in or around RAND on these mathematical models, with John von Neumann being the natural leader of the pack.

The importance of these models cannot be overstated. Their main party trick was mathematically to convert uncertain choices into clear-cut ones. The original idea (due primarily to von Neumann and later to Leo Savage) was simple: take every possible option available to the decision maker (e.g. in deploying a nuclear submarine off Vladivostok or reducing the price of your product to undermine your competitors); work out the expected value of each option, once you consider all the relevant probabilities; then, choose the option with the largest expected value.

Have you ever wondered where the financial engineers who gave us the now fabled toxic derivatives got their confidence to calculate exotic numbers, like Value at Risk (VAR), which lulled the banks’ risk managers into idiotic acquiescence to the laughable (supposedly “riskless”) risks their golden boys and girls were taking? The answer: these very mathematical models elaborated at RAND and other such Cold War research outfits in the 1950s. All these incredibly smart people believed strongly that their mathematical, expected-value approach was the way to go. All except one: Daniel Ellsberg, who soon, from first principles and out of sheer intellectual honesty, exposed the utter folly of the whole approach. To demonstrate this, he devised a brilliant experiment.

Suppose an urn contains 90 balls and you are told (a) that 30 are red and (b) that the remaining 60 balls are an unknown mix of black and yellow. (Importantly, you are not told how many of the 60 black-or-yellow balls are actually black or yellow. Indeed, they may all be yellow, all black, or any combination of black and yellow.) One ball is going to be selected at random and you are given the following choice. Option I will give you $100 if a red ball is drawn and nothing if either a black or yellow ball is drawn; Option II will give you $100 if a black ball and nothing if a red or yellow ball is drawn. Here is a summary of the options:

Red Black Yellow Option I $100 0 0 Option II 0 $100 0

Make a note of your choice and then consider another two options based on the same random draw from this urn (after the drawn balls have been replaced so that the urn contains the same balls as before):

Red Black Yellow Option III $100 0 $100 Option IV 0 $100 $100

Which option would you choose now?

The experiment, in which Ellsberg asked hundreds of intelligent people to make these two choices, revealed that most people select Options I and IV. Ellsberg then pointed out that these results cannot be squared with the mathematical approach (described above) favored by his RAND colleagues. Why?

Recall that the RAND mathematicians assumed that, when presented by uncertain options, the rational person will assign a specific numerical value to each and then choose the option with the largest such value. On this interpretation, when a person chooses Option I over Option II, she is revealing an expectation that there must be more red balls in the urn than black ones (since the number of yellow balls is inconsequential, given that she will win nothing in either option if a yellow ball is drawn from the urn). However, when the same person prefers Option IV to Option III, she reveals exactly the opposite: that she thinks there are more black balls than red ones in the urn. (Why else would she give a higher valuation to Option IV than to Option III?) But this cannot be “rational.” There is, indeed, no way one can rationalize a belief that there are more red balls than black ones when choosing between Options I and II and, at the same time, think there are more black balls than red ones when choosing between Options III and IV. After all, it is the same urn containing the same balls.

So, what is going on here? Ellsberg’s simple explanation is that people do not act as his RAND colleagues had expected. That they do not look at their various risky options, attach distinct numerical expected values to them, and then proceed to choose the one with the highest value. Real people, thought Ellsberg, care about something that the RAND scientists neglected: we do not like ambiguity! To see what this means, recall that, when choosing between Options I and II, the person who opts for I knows the exact probability of winning $100: it is 1 in 3 (since she has been told unequivocally that 30 out of the 90 balls in the urn are red). By contrast, were she to choose Option II, the probability of winning would be unknown to her (since the proportion of black balls is unknown). Now look at Options III and IV. Again, when choosing Option IV, one knows the exact probability of winning: 2 in 3 (since 60 out of the 90 balls are not red). In contrast, the probability of winning $100 when choosing Option III is ambiguous (as the proportion of red and yellow balls is unknown). In other words, the choices of I and IV can be explained by aversion to ambiguity and preference for options which come with precise, objective information about the probability of winning or losing. This kind of preference violates the RAND scientists’ logic but can by no means be dismissed.

This experiment, whose results Ellsberg published in 1961,1 has come to be known as the Ellsberg Paradox. Its significance is that it reflects a deeper problem with the whole of neoliberal economics: the type of economics that, especially after the end of Bretton Woods, took over not only academia but also the financial sector and economic policy making in government. Its basic tenet was, and remains, that uncertain choices can be treated as if they were safe ones, once risks have been factored in probabilistically! Riskless risk, in other words. Does this remind you of anything? Of the AAA ratings of the derivatives that blew up in 2008 perhaps?

Ellsberg had issued an urgent warning that probability assessments inadequately capture the way that uncertainty enters into decision-making. Though he did not say so himself at the time of the article’s publication, the experiment above should have sounded alarm bells every time a neoliberal model was proposed. Had Ellsberg’s scientific contribution not been ignored by the economics profession, the past thirty years or so might have been different. Alas, scientific results like that of Daniel Ellsberg can be safely ignored when the money trail points in a different direction.

The Great Leak

Possibly because of his deep involvement in RAND and the military-industrial complex of which RAND was such an important part, Ellsberg became deeply enmeshed in US government policy, viz. the nuclear arms race, the Cuban Missile Crisis, the Vietnam War, etc. Because of his unquestionable credentials as a RAND employee and a leading Cold Warrior, he had access to the so-called Pentagon Papers: a vast set of highly classified documents which proved beyond doubt that every US administration knew that the war was unlikely to be won and that casualties would be legion.

Shocked by what he read, Ellsberg started attending anti-Vietnam War meetings. In 1969, in one of these meetings, he encountered a soldier who was determined to take a stand against the continuation of the mindless war even though it meant going to prison. Coming in personal contact with a flesh-and-blood conscientious objector, a man ready to risk everything in order to do the right thing, caused Ellsberg’s epiphany which prompted him to become the US government’s most famous dissident.

With the assistance of another RAND employee, he spent countless nights photocopying the documents one by one. After his attempts to interest legislators in their contents failed, he leaked them to the New York Times and the Washington Post. The first explosive extracts were published in June 1971. Subsequently Ellsberg was fired from his job and was subjected to a trial in 1973 under charges that would have him spend more than 110 years in prison. However, the high profile of his case, rigorous defended by top attorneys, and clear evidence of government subterfuge (including a covert campaign to vilify and even injure Ellsberg) eventually led to his acquittal. To this day, the American establishment including RAND has not forgiven him.

Epilogue

At a time when our “liberal” states have issued what amounts to a fatwa against Julian Assange for helping make shameful truths public via WikiLeaks, it is important for this generation to remember, and learn from, the pioneers in this inter-temporal struggle against the misanthropic industry of military and economic obfuscation.

1 See Daniel Ellsberg (1961) “Risk, Ambiguity, and the Savage Axioms,” Quarterly Journal of Economics, 75 (4): 643-669. Interestingly, his experimental result came close to John Maynard Keynes’ rejection of the notion that, in an uncertain world, rational people behave as if they were maximizing some well-defined function involving mathematical expectations.

Yanis Varoufakis is Professor of Economic Theory and Director of the Department of Political Economy in the Faculty of Economic Sciences of the University of Athens. Varoufakis’ books include: The Global Minotaur: The True Origins of the Financial Crisis and the Future of the World Economy (forthcoming); (with S. Hargreaves-Heap) Game Theory: A Critical Text (Routledge, 2004); Foundations of Economics: A Beginner’s Companion (Routledge, 1998); and Rational Conflict (Blackwell Publishers, 1991). The above article summarizes arguments made in Chapter 12 of Modern Political Economics: Making Sense of the Post-2008 World, authored by Yanis Varoufakis, Joseph Halevi, and Nicholas Theocarakis (to be published in March 2011 by Routledge).





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