Youthful Insight

the worst is yet to come

2010-04-13T13:03:00.007+07:00

Our economic stronghold will be put under massive attack, mainly by China Asean Free Trade Agreement (CAFTA) and the other potential deadly thrusts by the exchange rate.

CAFTA starting from 1 January 2010 has spread fears among the domestic industry players, they argue that the free trade agreement scheme will cast destructive impact on the competitiveness of domestic industry.

And now, the exchange rate signals other potential threats to our industry, the preternatural pace of the strengthening Rupiah relative to US Dollar, with no sign of slowing down, will complete the two-pronged spear pointed at our economy, in term of domestic competitiveness.

Well, how bad are things going to be?

It's out now...

2010-02-23T15:46:00.003+07:00

Our two cents are published..Hopefully you can get it at bookstores nearest to your homes, and yet it is published in an ebook format...BUT, it is free...so check this out..

Do we Really Have Optimum Condition??

2010-02-05T13:40:00.001+07:00

One day, I and my colleague Heru santoso went to a Padang Restaurant, enjoy the meal very well and talk about many things. As Usual, we start a discussion.

Unexpectedly, I ask this this weird stuff :

Fakhrul : Mas Santoso, do you think this restaurant make a great price combination which maximize its profit? I think the price of rendang, Ayam Balado, Dendeng and other item did not maximize its profit. How can they only make a little parity between rendang and Ikan Bakar? they lose many surplus here.

And Santoso, answer :

Santoso : Do not think too complex… In fact the owner and manager never think like you... they do not make a model or something complicated stuff in pricing decision. They just feel and decide… is this price good or not? If it gives good profit for them, they will decide and don’t give a damn to optimum condition.

After the chat, I was thinking about how I calculate something, and how naïve I am if I assume every person think and make decision with sophisticated model like I do. Lately, I found some theory that explain this condition. Herbert Simon develops Bounded Rationality on modeling this condition. He said, “There are no optimum condition, we only have satisfied condition which limiting us from searching something better”. Bounded Rationality theory said, human decision is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make decisions. This contrasts with the concept of rationality as optimization.

So, Does assuming every person is rational and searching for optimu condition is right?

Source : Picture from Mightywombat.com

Have Most Economists been Fooled by Money?

2009-09-10T15:27:00.002+07:00

I always find Sumner’s argument as intellectually provocative, which I like. On his latest Vox column, he argues, and once again is against the rest of mainstream economists:

“Economists need not agree…that tight money caused the current recession…they do need to find counterarguments…not rely of assumptions that have been thoroughly discredited by recent developments in monetary economics…If I am right, it was a massive intellectual failure within the economics profession, not reckless bankers, that caused the crash of 2008”

What popped into my mind soon after carefully reading this piece was ‘is it true that there has been a massive intellectual failure, or ignorance to be precise?’ Why I say ‘ignorance’ because mainstream economists thought that The Fed’s policy providing some certain amount of interest for excess reserves was negligible, while Sumner argues that it has big influence on this current crisis.

Anyway, if most mainstream macroeconomists have thought easy money as the culprit of 2008 crisis, referring to bursting asset bubble then we can say this massive intellectual failure has been persistent for so long because The Great Depression, Japan’s ‘Lost Decade’, and current economic crisis were initiated by bursting asset bubble.

Have most of the modern macroeconomists been fooled? Or is it because easy money argument the most widely accepted by public and government authorities? Or Sumner is wrong about his whole tight money argument?

By the way, there are some very fundamental yet important lessons from this small piece:

· 1. Tight or easy money cannot be measured readily, especially when using interest rate as the indicator. When interest rates are high, common misunderstanding is that money is being tight, and vice versa. This conception is somehow a big failure.

· 2.Monetary base is not a reliable indicator to GDP growth, as in great depression 1930s.

· 3.Even broader aggregates are not a more reliable indicator to GDP growth.

· 4.When we do not fully agree to market mechanism, we still need to correctly and patiently understand market signs, as commodity price, production index, and stock price indicate. At the very least, these asset prices and others which are not short-term debt based, are preferable as indicator of easy money.

5. Money does matter, indeed, if not everything. We can see how money can highly affect movement in asset prices which are capable of dragging or boosting GDP.

Postmodern Economists

2009-09-08T20:29:00.008+07:00

Hello there, hello everyone! Well, having been granted the permission to blog here sure is like being granted the permission to write about almost everything in economics field (that is supposedly my specialty, or err the guidance for the rest of my life?). But please do enjoy.

Okay, let us just get to the thing. We, economist, in the end have to opt between being a quantitative and theoretical economist or intuitive and empirical (and skeptical?) economist. During my period of internship, I met those two kinds of economist. Those who believe in the power of econometrics and theories and those who believe in rather social well-beings (what ought to do, what is actually better for an economic agent with the given situation) and in empirical basis (could be their own experience of working in the field instead of sitting behind the desk like a dedicated and devoted super boring accountant). Of course, some might think that working with sophisticated models and complicated quantitative approaches is cool but after all we're economists not mathematicians. We just don't need to look cool with numbers.

Well, I can't say that I'm the one of those two kinds of economist. I just had my graduation last two weeks and I'm obviously confused about everything.

But, if you happen to like reading, The Economist's Tale by Peter Griffiths might be a perspective to support the later kind of economist I mention above. I'm able to honestly say that from his perspective, economics and especially macroeconomics is no longer boring subject. Economics has to be dynamic, adaptable, highly applicable and fun instead of rigid, theoretical and variables significance oriented.

Oh come on. it's just ramblings of fresh graduate's confusion.

Recession, a Major Threat to Economics Profession in Indonesia?

2009-09-08T09:35:00.003+07:00

I suppose most economics students must have been following hot debates on the state of economics, macroeconomics to be specific. One huge worry coming up in the air: is economics getting far less interesting than before? However, the real question is supposed to be can I get a job amidst sharp decline in belief of the magic of economics? The magic here refers to a suggestion by Paul Krugman who finds economics to be very exciting subject as it can explain the great events that move history, the forces that determine the destiny of empires and more powerful things just by a few and simple symbols on a printed page.

In an effort to answer the question, I stumbled into a very interesting paper by Paola Giuliano and Antonio Spilimbergo which tries to explain correlation between recession and belief in macroeconomy in US. They conclude that there would be less trust in an effort using tools of economics to succeed among people growing up during recession than those growing up during good times. They heavily depend on luck, instead. In addition, it is suggested that people are to be less confident in public institutions, and therefore public policy. This is the pitfall.

What about the case in Indonesia? Do you guys remember when economics was a very popular major among college students in Indonesia during 1990s? According to the journal, it is very rational since at that time, the economy was experiencing an upward trend with growth averaged 7-8 % year on year basis. What can the results be beneficial to us, economics graduate? Do you think we should not step forward to taking economics as our major in higher education? Or to be specific, monetary economics and public policy as indicated by recent financial crisis and declining trust in public institutions?

Unfortunately, I couldn’t obtain the same data explaining trend of popularity of economics major among college students, let alone general survey in Indonesia which can be used to conduct the same research.

Hence, for those who are studying public policy as their major in their graduate studies must be more relieved, then?

A huge question with even larger implications.

2009-09-08T06:33:00.004+07:00

During the 5th Anniversary Gala Dinner of the Lee Kuan Yew School of Public Policy, I was given the opportunity to ask Lee Kuan Yew himself a question. I asked him: "Indonesia is now faced with a condition that you have often warned against, where there are too many voices in the marketplace and the government is too easily influenced by public opinion. As a result, it becomes very difficult to implement economically sound public policies and long term planning for development. How do you suggest Indonesia deals with this situation?"

And for obvious reasons, he declined to answer.

However, now that I think about it, this question does not only apply to Indonesia, but to many countries around the world.

Take Obama and his healthcare reforms. People who are simply paranoid with terms like "socialism" and "euthanasia" have protested over his reforms, claiming that they will worsen the situation (despite the fact that ANY reform of the US healthcare system will be an improvement over what they have now).

Take SBY and fuel prices. Had he not re-lowered the prices, we'd be well positioned to NOT spend too much on fuel subsidies, and have a society that is well-prepared for another hike in fossil fuel prices that will definitely come about when the global economy recovers.

Take Margaret Thatcher. If she had caved in to her society's demands to remain in a Keynesian state, would GB have recovered from its stagflation the way it did?

Thus, here's the big question: Given a benign government in a democratic society (i.e. the government was elected by the people because they believed in it), would society be better off if its leaders were able to ignore the ignorant? That is, to not become swayed by every protest for every policy?

Using toll fees right.

2009-08-27T14:19:00.003+07:00

The Indonesian parliament is currently debating the issue of whether or not to raise toll road prices. The plan proposed by the government is to raise the toll fees by 15%, and the parliament currently opposes immediate implementation because it fears that raising the toll fees will contribute to the Ramadhan seasonal inflation.

I feel that they're spending too much time debating an issue that can be easily worked around.

Here's the solution:
If you want to raise revenue from the toll fees without contributing to inflation in general, then you only raise the toll fees for private vehicles. That way, you don't raise transportation costs for firms, and inflation doesn't become an issue. Furthermore, you get the added benefit of influencing individual behavior. Significantly raising toll fees for private vehicles is a way to curb usage of private transportation. The more expensive it is to travel in private transport, the larger the incentive to switch to public transportation. I'm not saying that raising toll fees is enough to do this, but it helps.

Deterrence, taken too far?

2009-08-18T10:13:00.003+07:00

An article on the Economist about America's sex offender laws.

It's really a matter of the trade-off between effectiveness of a law and social convenience (a term I use rather loosely).
The tougher a law, the harder it is for people to comply, but the better it is at carrying out its intended purpose. The more lenient the law, the less inconvenient it is for the "minor offenders" mentioned in the article, but the easier it is for the serious ones to avoid.

I neither agree nor disagree with the economist saying that the laws are too harsh. But what really needs to be looked into is: do the current laws achieve the intended level of protection, and can the intended level of protection be achieved with more lenient laws? Obviously, the current level of enforcement and strictness was achieved in the wrong way (damn vote-seeking politicians), but that doesn't necessarily mean the laws are too strict.

Does now become harder to be one of the richest person in history???

2009-08-18T00:49:00.005+07:00

Someday ago, suddenly I found a very interesting article in Wikipedia, about the wealthiest person in history (inflation adjusted).

In this issue, I found some very interesting fact. The list tells us that no one of the richest person live in this era (Late 20^th Century and 21^st Century). Even Bill Gates wealth just a little piece of theirs. John D. Rockeffeller (The wealthiest in history) net worth has ever reached US$329.9 billion. However, Bill Gates can only achieve US$101 billion (He got it in 1999). While analyzing the source of their wealth, we can divide it into two type. First is from business and other is from political power as a king, queen, or other form of authority.

If we analyze the condition while they achieve that, simply we can find an interesting pattern. All that businessman lived in the late Industrial Revolution era. The biggest different between the era and now, is about the flow of information that still bad (Asymmetric Information), lack of equality (in knowledge and education), High Barrier to Entry, lack of competition policy and another condition that make the business have very high market power and can exploit it in order to maximize the profit. For Example : Rockeffeler has monopoly power in oil market in US through Standard Oil, and enjoy it very well until Sherman Act issued at 1890. We can imagine, how much value has been achieved by him.

In the cause of political power. politician (king, queen) achieve wealth with exploiting their power, as a consequence lack of development of democracy, no balance of power and another bad condition that make government is far from efficient. Tsar Nicolas II from Rusia is one of good example for this condition. He achieved net worth US$290.7 billion in his life. In Russian History, he is known as a dictator and has made many disaster like Khodynka Tragedy, Bloody Sunday, and the anti-Semitic pogroms and many more.

What about now? Today we can see that, market is become more competitive and more efficient. Globalization also make everyone can do many thing more flexible and easier than ever. Information is become easier to get. The access to education is become easier to find, and knowledge not only a competitive advantages that enjoyed only by a little segment of society. In government side, now, democracy is well developed, the balance of power is formed, and control mechanism for government action are well established, and become harder for politician to get abnormal gain from his power.

So, can a person today become as rich as them? The answer is “possible” but it become harder than before. The market become more efficient, low barrier to entry, regulation for monopoly case, and another constraint make impossible for businessman become as rich as rockeffeller. For politician, the developing of state, republic and Democracy make impossible for them become as rich as Tsar Nicholas.

Ow… It is a good point. In other side we can conclude that, the equity between human in the world become better, since economic growth and opportunity between human become equal. May be now, you can not be as rich as Rockeffeler. But your opportunity to become wealth and rich is greater than before.

Electoral musings.

2009-04-15T20:59:00.002+07:00

One question still lingers in my head, after viewing the Indonesian Parliamentary Election results: did the other 35 parties realistically expect to get enough votes to breach the electoral threshold?

I don't quite understand why these smaller parties actually thought they stood a chance against the bigger parties. Keep in mind a couple of things:
1. The bigger parties are, well, bigger. More funding, more supporters, better reputations. It's hard to compete against parties that get much more publicity than yours.
2. The smaller parties are mostly new, making it that much harder to establish a name for themselves.
3. The smaller parties have nothing special. Most have platforms that are very similar (if not nearly identical) to the bigger parties, because many of these smaller parties were formed by former members of the large parties who couldn't get the positions they wanted in the MP roster. Not to mention that Indonesian politics isn't so much about the platform as it is about the big names.

So, when a 44-party election results in one party getting 20% of the vote, while 29 parties didn't even get 1%, I think it's rather clear that having 44 parties is a waste of campaign funds, no?

P.S. And, apparently, it's also a waste of mental hospital space. No, but seriously, the failed candidates are doing some pretty crazy stuff.

On useless publicity stunts

2009-03-29T06:47:00.002+07:00

Yes, I'm talking about Earth Hour.

Like giving to charity and assisting old ladies with their grocery bags, preserving the environment is something we choose to do because of our moral compulsions, and not because of any direct benefits. The only "direct" benefit we get from it is the feel-good effect: we think that doing it makes us better people, and everyone enjoys the idea that we "made a difference" by supporting a good cause.

However, what's most important to individuals isn't that their activities actually help, but that they attempted to help. You know, "it's the thought that counts". That's why research has shown that mechanisms designed to stimulate charitable giving are likely to increase the number of people giving to charity, but are not likely to increase the amount of money donated by each individual. (I read this months ago, and I'll post a link when I find the relevant article)

Simply put, Earth Hour is an easy way out for people to get their environmental feel-good effect. "Oh, we've saved enough energy to light up 900 Indonesian villages! Yay!" say the Jakartan public, as they rush to turn their lights, computers, LCD TVs, and air conditioners back on. And in the morning, as they drive at a snail's pace through the heavy Jakartan traffic in their gas-guzzling SUVs (with AC on full blast, obviously), they'll have this warm, fuzzy feeling inside, because they think they've made a positive contribution to the fight against global warming.

If it actually raises awareness on energy conservation for the long run, that's great. But I'll hope you'll excuse me for being a bit skeptical.

The wrong benevolent mechanism at wrong place..

2009-01-26T23:34:00.004+07:00

FYI, I have been going to faculty of economics for almost four years and I have got the senses that this campus is full of incentives-responded mechanisms ever since. Thus, actually, I was quite shock for a while knowing that from badge of 2006 on, every single student of economics must take environmental or human resource economics as one of his concentrations...It's nonsense...

What were they thinking to have students choose one of it? Is it like something they play God?
Truly honest, I can't tell why environmental or human resource? Moreover, why MUST? Didn't they take some important lesson about people responding to incentives thing from econ 101?

Obviously, they are not economists (should I put some 'quote' on?), yes?

Are they long-awaited saviors or mere lemons?

2008-11-24T20:43:00.003+07:00

I find Indonesian next year presidential candidates and used-car markets are somewhat similar. Both of them offer nothing but high risk, low return for voters and buyers, respectively. Why? In short, as in Akerlof’s model, used-cars market (Indonesian presidential candidates market) entails lemon’s problem, a problem that prevails when buyers (voters) can’t figure real quality of the cars (candidates) they are going to buy, and thus buy the lemon ones (idiot, greedy, and immoral candidates) instead of mint ones (smart-visionary, ascetic, and law-enforcement-oriented), because there is asymmetric information between dealers (campaign managers) and them.

The dealers try to conceal real information about their cars, hoping they can reap benefits from it, while the real quality is far below the standard, for sure. It is because owners of moderate-quality cars who want to sell their cars due to high cost maintenance would rethink about it for their utilities for keeping their cars exceeding their utilities that emerge from selling it with prices dropping significantly. As a result, cars left to be sold are of the worst quality whose former owners’ utilities are at highest if they sell it because their cars entail severe problems, assuming more people will keep their moderate-quality cars at their garages.

It’s the same with next year presidential candidates’ condition, I suppose. As you know, there would be many very popular yet unknown candidates; they are newbies. Interestingly, like Indonesian celebrities, those candidates are very popular merely because of their outer appearances, but not well-known for what they have done for a better Indonesia, unproven yet, at least. In addition, they deliberately created a dichotomy for youngsters and old cracks, and said that the youngsters are the ones needed by Indonesia at the moment, which is not an elegant campaign, black campaign indeed. Moreover, their track records show that they are not credible; there would be one book-length to tell. As predicted, campaign managers, of course, will tell nothing but only the best parts of their candidates in order to conceal the real ones, which are not that good. However, it would be wise of you if you block your ears with something and leave them telling bullsh*ts. Asymmetric information prevails.

Assuming Indonesian political realm is so dirty that not even worth a second for a man to think about getting involved into the system, let alone fixing it as it contains back-stabbing, highly-corrupted staff, abundant problems, etc. Hence, obviously, smart and rational people will not even ‘try this at home’ since it appears that the system is incurable and clearly no incentives for them, assuming a few nationalists and smart people left who want to volunteer to be a president. Therefore, only idiot-greedy-immoral candidates left, yes? So, why should we believe in such ‘youngsters’ that have repeatedly proclaimed as the ones who are able to lead our nation into a better future? The probability of them to become our long-awaited saviors is very tiny, if not at all, no? Anyway, it’s up to you if you want to vote or not.

How to stop those crazy motorcyclists once and for all!

2008-11-14T09:03:00.002+07:00

I wrote a post months back about how we should make regulations that free motor vehicle drivers of any liability if they run over a jaywalker. I think we should try doing the same thing for motorcyclists.

The unwritten Jakartan traffic law of "he with the most wheels is most at fault" has rendered motorcyclists free of most liability whenever they're involved in an accident involving cars. Even if it was their stupidity that caused them to attempt to overtake a car from the right when the car was, say, trying to turn right at an intersection (true story), the people in the car will most likely end up having to take the motorcyclist to the hospital and help out with the bill.

I'm sure everyone has their fair share of motorcycle related incidents, whether it be hit-and-runs on sidewalks (last I heard, motorcycles aren't allowed on sidewalks) or rear-view mirrors getting grazed by motorcyclists trying to squeeze through gaps between cars.

Enforcement of the "motorcycles are only allowed to use the left-most lane" law has been completely non-existent, mainly because motorcyclists outnumber police officers by quite a significant margin. What we need to do is get everyone else to help with enforcement. Extend the law to include "any motorcycle outside of the left-most lane is fair game to be run over", and I'm sure we'll see much safer streets. The first few days will be bloody, but after that, peaceful streets at last.

P.S. I realize it's quite extreme, but so are the antics of some of the motorcyclists I've seen recently. The madness has got to stop.

P.P.S. I also realize that even attempting to pass this law would bring about a massive uproar. But, then again, we also recently passed the Pornography Act, which proves that idiotic and unpopulist laws can get passed in Indonesia, so I'm optimistic that this law (perhaps equally unpopulist, but much less stupid and much more useful than the Pornography Act) will work out just fine =P.

On Structural Transformation...

2008-11-11T22:00:00.002+07:00

This afternoon, over lunch, I had an interesting conversation with some friends of mine which really did get me thinking. Two of my friends were preparing for a paper presentation, which they said would be coupled with some sort of debate-related activity. They asked me to help them by providing my insight on structural transformation.

Now, I haven't given this concept much thought since it was first introduced to me in a class two years ago (a class which I failed, and have not yet retaken, I might add). But feeling compelled to give a better answer than "you're asking the wrong guy, I failed the class for a reason, you know", I actually thought about it.

What immediately popped into my head was how the concept of structural transformation (that is, the concept that countries need to develop their industries according to a fixed progression starting from agriculture to light manufacturing to heavy manufacturing to services) is probably irrelevant in this globalized world, where technology and information are extremely mobile, and where there now exist a great variety of ways to produce all goods and services (low tech or high tech, labor intensive or capital intensive), making it possible for any country to specialize in anything at any point of their development.

In a world where the agricultural products are not only produced in farms and fields but also in labs, where Nike shoes can be produced with high-tech machinery or with manual labor in sweatshops, where developing countries like Indonesia and the Philippines export their people to become housemaids and nurses abroad, where US-based MNCs outsource their customer service centers to India, and where China's massive labor force allows them to create whatever industry they want, there really is no sign of any fixed progression or "structural transformation" taking place.

On recent occurrences.

2008-10-28T09:56:00.002+07:00

This post should probably be a comment on Lionel's previous post, but I'm writing it as a new post simply because I can.
Disclaimer (since this seems to be necessary nowadays): I personally don't profess to have the answer to everything, so please do criticize/flame (preferrably the former) as necessary.
Second disclaimer: this comment may very well be obsolete by the time it gets published, but I just feel that I need to put in my two cents.

Firstly:
Policy measures intended to stimulate a specific reaction in one sector may not be the best course of action, even if said policy succeeds in creating the stimulus. Why? Because these policy measures can create unintended and unwanted consequences. Thus, policy measures cannot afford to be one-dimensional, and policy makers should never be afflicted with tunnel vision.
For example, even if an increase in interest rates does ebb the capital flight and alleviate our problems in the financial sector (let's assume that it does), any possible consequences in other sectors warrants consideration. Cost-benefit analyses must always be conducted multidimensionally.

Secondly:
Every theoretical basis needs to be contextualized before being used as the foundation of a policy.
For example, even if a continually rising LIBOR generally calls for an interest-rate hike to remedy the impacts, the specific context of "why is THIS particular capital flight occurring?" needs to be taken into consideration. One can argue that given the current situation, where we can assume that perceived investor discount rates have gone near-infinite, policies that hike interest rates will not significantly affect capital flight.

Just my relatively peaceful two cents on the matter.

Indonesia's Electoral Nonsense

2008-10-05T12:43:00.003+07:00

Looking at the U.S. Presidential Elections and the campaign process makes me wish Indonesia's elections would actually be about issues. Instead, we have a campaigning process that is completely devoid of anything even remotely resembling a platform. I did a quick search of political party websites, and only one of them actually contained a link to their "platform". The others only had very vague vision/mission statements, which provide no real information about the party and what it stands for.

I guess that's partially because demand for such information is rather low as well. Not many of your Joe Sixpacks (to borrow a term from Sarah Palin) in Indonesia would be interesting in knowing the detailed platforms of what kind of political, ideological, and economic beliefs the party holds. They're way more interested in the rallies, holiday parcels, and the other free merchandise given out. In other words, parties can substitute cash for platforms in order to win votes.

This, in turn, creates an incentive for anyone with a pocketful of cash to start up a political party. Thus, the superfluity of small political parties we can see today. Since these parties don't have distinctive platforms, they end up only cluttering the election process with no real gain to the system and the people as a whole.

The solution to this seems obvious and simple: political education. In other words, empower voters by giving them complete information on the political parties and their platforms, so that they can make an informed choice during the elections. However, this is unlikely to be enforced by the parliament. This is simply because this kind of empowerment would be against the interest of those currently in power. Policy makers in parliament would find that their jobs get a lot harder when they face an educated and demanding constituency. The kind of accountability that is expected of parliament members is much harder to fulfill when the voters know what's going on. Having an uneducated and "buyable" public would make the politicians' lives a whole lot easier.

So, with this evident conflict of interests in the parliamentary level, and an uneducated majority with "buyable" votes, is Indonesia's democracy doomed to failure? I really hope not, but I'm rather pessimistic.

Corruption is not moral issue

2008-06-26T13:05:00.002+07:00

As we all know that corruption is bad for growth , as concluded by several studies, such as Mauro (1993), but what do you think about the statement which tells that corruption fixes one’s moral in bad shape?

Why do you think that statement comes up to surface? I think it’s because corruption has been called as a part of a state’s culture. Corruption has become a purported culture, if you may say so, because it’s made of habit, and habit is made of persistence opportunities.

The next question is why do people corrupt? The cliché motive is economic one. Because people can’t always have bread for himself or his family regularly. His real income can’t fulfill it. So, in order to maintain his and his whole family in standard way of living, he would find a way at all cost, assuming he really loves his family. Thus, he corrupts.

As I consider the most dangerous actors of this act are bureaucrats, because they can distort public interest. Assuming that a bureaucrat is a rational man that he would respond to incentives, and vice versa, and would make a decision based on cost-benefit analysis. So, he would be very rational if he corrupts while there is no hang rope awaits. On the other hand, he would be very irrational if he doesn’t take a chance to corrupt while most of his colleagues do it.

Why? Because by not doing so he would incur cost by feeling pressure, while, assuming that most of his colleagues and even his boss do so, could not get any benefit since his boss is no different with his friends. As a result he may end up quitting his current job and may not get a job easily, considering one’s age.

Why so bothered? Weak law enforcement, low salary and flawed supervision would, by any chance, create what you call ‘korupsi berjamaah’, a situation which is very common in our beloved country. When this situation persists, a state would be in jeopardy because one would be strongly connected to one another. You won’t bet your money on having a whistle blower coming up.

So what’s the solution? First, of course, assuming general motive of corrupting is economic motive, you must raise their salary, although this won’t automatically raise their productivity, but at least you may have a reason to kick lazy ass. Second, guarantee law incentives and compensation for a whistle blower. This would bring the systemic corruption into a demise, assuming that a whistle blower would give more than two names, and they would confess, considering the most plausible point is two of them confessing, and give another name and this would create a multiplier effect; thus all of them would occupy hotel prodeo. And yet, this won’t happen if the law enforcers are readily bribed.

In conclusion, corruption is more or less not a moral issue, but an incentive issue, instead.

Notes: for my fellas, please don't point your finger only to the corruptors, but to those who have shaped them into these. Don't go shouting just for Urip's sake, but also for Hendarman Supandji, the big boss...

Politician's Optimum

2008-05-29T23:44:00.003+07:00

Many things have been said in newspapers, on TV, in classrooms, on blogs, and on all other media regarding the recent fuel price hike, BLT, Tugu Rakyat, and all of the other political whatnot.

There seems to be a growing observable trend: whereas politicians and economists who support the recent government policies always strive to make rational, logical, and empirically-backed arguments that would always make sense to those who actually pay attention, the politicians and economists (well, mostly politicians) who oppose the fuel subsidy cut and price hike are making less and less sense every day, and seem to be getting a lot of exposure and (gasp) support for it.

So, why exactly are some public figures so adamant in defending policies that are guaranteed to flush 130+ trillion rupiah down the toilet? Simple. Telling the public what they want to hear will get you votes. Votes get you a position in the government. It will most likely get you into office in a period where the budget deficit reaches over 3-4% of the GDP with no way to finance it, but power is power, apparently.

The problem with society right now is the tendency to stop listening when you say the words "price hike". Granted, it is a phrase that sounds bad, but when oil prices are rising that rapidly, it's inevitable. Of course, for a society used to pegged fossil fuel prices due to excessive subsidies, this might be hard to take in.

So, politicians exploit this market imperfection to gain votes by promoting the economically incorrect yet way more populist policy of "not letting our people suffer" (despite the fact that the ones who enjoyed most of that subsidy was the middle class, but again, we economists just lose the audience at "price hike").

Obviously, the fervent defence of "the people" will get the masses to start believing that subsidies are still doable, and that they're even entitled to it. So, basically, misinformed public + opportunistic politicians = no end in sight to these horrendous notions.

And I thought the educated are around to enlighten the masses. Guess things are different when politics are involved.

How not to prevent panic buying

2008-05-20T09:37:00.003+07:00

The government apparently believes that limiting gasoline purchases to IDR75000 per purchase is going to stop people from rushing, panicking, and filling up their gas tanks on the last day.

Well, it won't.

Notice that the regulation only sets the limit to IDR75000 per purchase, rather than IDR75000 per day.

What does this imply? It simply adds a transaction cost in the form of the time it takes to find another gas pump on your way to work. Does this really prevent panic buying and cause people to just fill IDR75000 per day and not clog up the streets and gas pumps on the last day before the price of gasoline rises?

Let's see. With this new policy, someone who wants to fill their tank with IDR150000 worth of gas will have two options: fill up in 2 different gas pumps, or fill up on two consecutive days. Someone who sets out to fill their tank with IDR225000 worth of gas will also have the option of finding 3 gas pumps or just going to the same gas pump 3 days in a row. Depending on how many gas pumps are on your way to work, it might be more of a hassle to find multiple gas pumps, so people would choose to spread out their purchases over multiple days.

However, what would happen on the last day?
On the last day, the options available to the people are still the same, but now spreading out their purchase of gasoline will bear the additional cost of higher prices on the next day. Thus, this option becomes undesirable. What will people do? They will attempt to fill up their gasoline on that day, at all costs.

The thing about panic buying during the last fuel price hike was that once cars filled up their gas to full tank, they went home and stopped clogging up the gas pumps. With this new policy, each car will probably clog up two or three gas pumps over the course of the day, because the first time they get in line they can only fill IDR75000.

So, in effect, this IDR75000 limitation will only serve to worsen the congestion at and around the gas pumps. Good job, government.

Indonesian farmers: beyond help?

2008-05-01T06:09:00.003+07:00

Price hikes are always golden opportunities for producers to exploit. As prices of food products rise due to the increasing popularity of bio-fuel research, countries in Latin America are investing increasing amounts of money in their agriculture; the European Union is now facing raging debates on whether or not to produce genetically modified crops in order to fill the void in the world food supply; and yet, Indonesia, as a country with 44% of its workers in agriculture, doesn’t seem to be doing much.

And yet, a question arises in my head: even if the government were to do anything, would it have much of an impact on the farmers themselves?

Indonesia’s agricultural industry is rife with asymmetric information. Rice distributors, wholesalers, and exporters, usually city folk with access to urban market prices and world market price data, have always seemed to have the upper hand over the rice farmers, rural folk who do not enjoy the same access to information. As a result, farmers suffer from a weaker bargaining position, causing them to undersell their rice almost every time.

With the growing food price hike, pundits are urging the government to make use of this “golden opportunity” to drag Indonesia’s farmers out of poverty, by investing more in the agricultural industry. However, what people fail to see is that the existence of this asymmetric information means that the positive welfare effects of rising rice prices will not be felt by the farmers themselves, but by the wholesalers and middlemen.

How do we fix this information asymmetry? For starters, most Indonesian farmers are too poor to afford the technology to access this information. They simply cannot afford to purchase cellular phones and laptop computers. Add on to that, the fact that infrastructural developments in Indonesia’s rural areas are going at a snail’s pace. Let alone cellular phones and internet access, many farmer villages barely have access to electricity!

Government institutions need to step up and take the responsibility of insuring informational symmetry. If necessary, government officials from the Ministry of Agriculture should give farmers weekly updates on prices, as well as giving them institutionalized protection from distributors and middlemen who seek to exploit.

Whether this would actually happen in the future is quite unlikely. Maybe some government officials have vested interest in this asymmetry (I say maybe, so I don’t get sued for insulting government institutions like the band “Slank” did). Perhaps (just perhaps) they have deals with the rice distributors, or perhaps they double as the middlemen themselves. All I know is, nothing that I’ve written here is news. It’s probably been talked about ad nauseum. But nothing’s been done.

Well, that’s our government. Go figure.

Bureaucracy Reform is not Sufficient

2008-04-04T23:45:00.001+07:00

When I was searching for an econ journal in my laptop, I found an interesting journal. Murphy, Shleifer, and Vishny (QJE, 1991) offered a new insight to me on economic growth. They concluded that bigger proportion of talented people working in rent seeking sector slower economic growth in US economy.

They argued that the ablest people in the nation working in rent seeking sectors, such as becoming lawyers and security traders, would give impact to a low quality in entrepreneurship which slower down the innovation that leads to lower economic growth. Further implication on budget allocation is that, in general, education should get more, engineering to be specific, and incentives in research area so that innovations could emerge heavily.

Anyway, what do these implication and conclusion apply to the reform in dept of finance in Indonesia? One of common beliefs of why Indonesian economy can’t run so fast to reach 8-9 % growth is that high-cost economy caused by poor performance and corruption of bureaucrats which are outcomes of low salary. So, dept. of finance found that the solution is to raise the salary which aims to increase their performances and also to attract the brightest graduates to work there.

I don’t know yet if this works or not. But, let’s assume that this works and the brightest economics graduates work there. This leaves low quality entrepreneurship assuming evidences found by Murphy, et. al., apply on Indonesia, as well. Moreover, many of engineering graduates are not attracted to work where they should belong to. The result is slow innovation process yielding slow growth.

Thus, according to suggestions conveyed by Murphy cs., this solution is just a necessary condition to a better economic performance of Indonesia. Bigger share of budget allocation on education in general and engineering to be specific and also more incentives offered in research area would complete this to sufficient condition. However, a recent cut in education budget, the largest cut among others indeed, really bewildered me.

Three questions popped up in my mind. First, did the govt really think that bureaucracy reform is sufficient to improve the economy? Second, are they just short-sighted considering better human capital will not lead to better economic performance? Last but not least, if dept. of finance and entrepreneurship sector needs the best ones, where should I, an average future economic graduate, work at?

Ah, after all, I think what my controversial lecturer Sri Mulyono said nearly three years ago that economic growth of a nation is mainly determined by its mastery level of technology would meet its reality, yes?

Lobbyists and Reverse Spock-ism

2008-04-03T13:27:00.003+07:00

I read an article in the latest issue of Time magazine that John McCain is being scrutinized over his relationships with lobbyists. He was asked about certain moments in his history as a senator where he voted in favor of legislation that just happened to coincide with the interests of his lobbyist friends. In each case, McCain and his aides just answered that his personal relationships never affected his decisions, and that was that.

Bottom line, it seems that the general perception of the media is that listening to lobbyists is tantamount to murdering the masses. Lobbyists are inherently greedy, evil, always up to no good, and seek to benefit no one but themselves, and do it at the expense of everyone else in the country.

My question: are lobbyists really the devil, and is it really that bad to listen to them and vote in their favor?

Lobby groups are formed by people who stand to lose/gain a lot from policies that would have miniscule effects on everyone else. An example, taken from Tim Harford's "The Logic of Life" would be the sugar lobby in the United States. Legislation over trade barriers and subsidies would only affect the average U.S. citizen by about six dollars either way (6 dollar loss with trade barriers and increased price, 6 dollar gain with free trade and lower world prices in the domestic market), but for a sugar producer, the stakes would be about 10000 times that amount, give or take a couple of zeroes. In other words, their livelihoods depend on the outcome of the vote.

Thus, not only does it make sense that lobby groups would put so much effort into trying to make the vote go their way, but it also makes sense that people would vote in favor of the lobbyists. Put it this way: Would you rather vote for a policy that made 100 people $100000 richer by taking $1 from everyone else in the country, or a policy that makes everyone in the country $1 richer while killing 100 people?

Isn't it the same logic that applies to progressive taxation used to support a welfare system? Take from people in amounts that are bearable to them, in order to help people who would benefit greatly from it.

I'm not arguing morality, so I am not trying to say which is wrong and which is right, and which would truly serve the greater good. Sometimes, lobbyists do support the interests of greedy monopolists and oligopolists who just wanted to crank up their profit margin. But sometimes, for policy makers attempting to conduct a cost-benefit analysis on the policy at hand, the distinction between genuinely helping a needy minority and murdering the masses isn't quite clear.

The conclusion I've personally reached: lobbyists are not the devil, they are just rational people who feel the need to take advantage of the inherent flaws within the political process, because they feel their lives are at stake. Thus, the most important thing is to make sure that when lobbyists are trying to pass legislation that would, in effect, syphon money from the average taxpayer into their already-pretty-thick pockets, the majority is ready to get off their lazy behinds and form counter-lobbies to fight for their livelihoods as well. After all, it's only majority rule when the majority care enough to rule.

Why Americans Aren't Smarter than Fifth Graders

2008-03-24T21:38:00.003+07:00

For those of you who aren't familiar with it, the show "Are You Smarter Than a 5th Grader?" is a quiz show where adults have to answer 10 questions taken out of an elementary school curriculum, with 2 first grade level questions, 2 second grade level questions, and so forth until the 2 fifth grade level questions. If they answer all 10 questions, plus the million-dollar-question, they will walk away with - yup, you guessed it - one million dollars.

Problem is, not many people succeed. In fact, most people stumble after their fifth or sixth question. But wait, there's more. A network will never make a game show where they have to give away one million dollars every episode, meaning that in order for the show to be approved, the producers have to know for sure that not many people are going to be able to reach the one million dollar mark. They must have known that the questions would prove too difficult for most adults to handle.

Now, what does that say about the education system? Does it mean that the American education system teaches too many irrelevant things that students will not bother to remember beyond grade school? Does it mean that the education system employs teaching methods which have a very low level of retention? Or is it just that most adults discard information they consider irrelevant, in order to commit more of their memory to things that become more relevant to them as they age?

I don't know which one it is (or maybe the answer is something else), but something is definitely wrong when the CEO of a construction company can't answer a 4th grade math question.

The consequences of altruism

2008-03-23T22:00:00.003+07:00

A mild concern just popped up in my head after I waved away a beggar while waiting on a red light at an intersection: When welfare and social safety nets remove the incentive to find work, and when giving alms to the poor keeps beggars on the streets to ask for more, what can we do to really help them get a better life? Do altruism and philanthropy actually make the poor worse off, giving them the illusion that what they're doing (begging on the streets, collecting welfare payments from the social security office) can substitute for a job?

Some industrialized countries such as the U.S. are now using workfare instead of welfare, where welfare payments will be cut off after a certain amount of time unless the recipient finds a job. But with the same logic, that policy might actually delay the job-hunting process until the time limit.

I haven't had the time to read up on recent issues regarding welfare and social security, but I think it's rather unfortunate that policies aimed at providing welfare for the poorest, as well as individual altruism and philanthropy, can actually hurt more than it helps, in the long run.

Gaming theory

2008-03-22T19:57:00.002+07:00

Found an old link from the Game Theorist blog (about the economics of parenting) about negotiated chess rules. It's basically a story about how the author's children modify chess in order to ease the fulfillment of their objectives.

Now, the anecdote showed that it was easy for each child, both to make rules and to accept rules offered by the opponent, because each child had their own objective in mind (the daughter wanted to win, the son just liked to make patterns).

How would this game work, I wonder, if two adults with the same objective, i.e. winning, tried to play? The game of chess would be played with one simple rules twist: at the beginning of the game, each player would be able to announce one symmetric (that is, applies to both players) change of rules. The controller of the white pieces would go first, and the controller of the black pieces may reject the rules change in place of proposing his/her own. If, however, the controller of the white pieces chose not to make a rules change, the controller of black pieces would not be able to make a change.

Surely, they would realize that whatever rule they propose to give them an advantage can become nullified, or can even backfire, once the opponent figures out the intention behind the rules change.

So, what would they do in this situation? What kind of decisions would they make? Would the players end up playing normal games of chess, or modified versions, each trying to gain strategic advantages over the other and hoping that their opponent can't read their plan? In repeated games, would the players offer the same rules changes every game, or change it up every game? Would players use rules changes that were previously used against them?

Personal anecdote: I used to do the same thing with my little brother for games of rock, paper, scissors, and other random small games which could be played in long car/plane rides and/or boring parties. Results? We changed up the rules all the times, sometimes working for us, sometimes working against us, and we always had a blast.

Potential game theory gold mine, no?

More on punishments

2008-03-22T19:24:00.002+07:00

A link I came upon while skimming the Freakonomics blog.

For those who don't have enough time to click on the link and read the article (highly recommended), here's the gist of it:
Spanking has been found to be an ineffective form of punishment for children, and it becomes harmful when done repeatedly. The author then talks about his personal experiences, inserting bits and pieces of game theory into the analysis of how to properly use punishments.

Now, this would be very useful information, except for one thing: Will the things that apply to children in terms of parental punishment also apply when the state punishes adult criminals?

Vigilante mentality (part 1)

2008-03-14T09:53:00.002+07:00

I wrote part 1 because I feel that it requires a bit of thinking before I can actually write something that even remotely resembles analysis.

I had previously written a post about the death penalty, and the effectiveness of the punishments in the legal system. Somehow, this morning, I found myself thinking back to it, and since I was eating chicken at the time, a spark suddenly ignited the locomotive of my train of thought (yes, I'm bad at metaphors, I know, but at least I try).

Every Indonesian knows what happens to maling ayam, or chicken thieves, when the local villagers catch them. What occurs is vigilante justice at its finest, with the thieves usually being beaten to a pulp, or in some cases even burned alive.

One of the main shortcomings of the legal system, especially in developing countries, which characteristically lack discipline and structure in their governmental support systems, is that it is slow and generally incompetent, because it works under presumption of innocence, where it is the burden of the prosecutor to prove, without leaving a reasonable doubt, that the crime was indeed committed by the defendant. This requires the culprit to be caught (which is by no means a 100% certainty), the evidence to be collected (which is also not 100% successful), and the jury to be convinced (which is probably the hardest part). This leaves a lot of room for the culprits to escape the long arms of the law, and thus the deterrent effect that the legal system has on crime is very limited, especially considering all the other factors (for more detail, read my death penalty post which I linked to in the beginning of this post).

How, then, does the vigilante mentality of "beat first, ask questions later" which, more often than not, results in "kill first, ask questions later" affect crime? It would be an interesting subject to analyze, and would answer a lot of questions and provide a lot of insight into the incentives and disincentives governing crime.

The educational incentives

2008-03-10T20:42:00.003+07:00

[warning: upon reading this, you may feel that I sound like an arrogant, judgmental, and ungrateful student for calling some lecturers boring. Believe me when I say that this article was written not for lecturer-bashing, but just as a form of expression, and also for the sake of getting what I believe to be a good idea across.]

When the only thing keeping students attending a certain class, taught by certain boring lecturers, is mandatory attendance, and when this mandatory attendance requirement causes students to miss out on other things which are more important in their agenda, it is clear that there's something amiss.

A student's incentive to enter a classroom, sit for 2 hours or so, and listen to the guy talking in the front of the classroom, is that he/she will gain some form of utility from the amount of time spent. Whether this utility be in the form of gaining knowledge, getting a good grade, or even entertainment (the lecturer might be a really interesting guy), this is what students actively seek out in their attendance of class.

However, it must be kept in mind that students, like other rational actors, want to do a number of other things as well, but they only have a limited set of time. In other words, there are trade offs to be faced, and there is an opportunity cost to attending any particular class. There might be assignments for other classes that are due, he might be really hungry and just happened to miss his lunch hour due to other trade offs, or he might also be slightly sleep-deprived and drowsy.

Thus, when it comes to that, students will, like other rational actors, attempt to maximize their utility within those time constraints. If the class isn't all that interesting, they may simply choose not to attend, with full knowledge of the risks and consequences.

It also logically follows that, all other factors set equal, students who do not attend classes regularly will experience more difficulty with exams than those who do, because the students who do not attend classes are more likely to have missed crucial information which would have been given during class.

Thus, given that university students (especially economics students who are familiar with the concept) will be able to make rational decisions, and that absence from classes in itself already acts as an impediment towards getting good grades, why are mandatory attendance requirements still being enforced?

The only argument for mandatory attendance is that students are innately lazy, thus making them view attending classes as a disutility and also making them always choose any other alternative over attending class, if given the freedom to choose. However, this would be quite a ridiculous assumption to make about people who have entered their adulthood. Although this assumption would be correct with primary schoolchildren, whose young minds yearn for recess (or better yet, the dismissal bell) at all times, it would not apply to adults who make an informed decision in attending college.

Even if certain classes were regarded as a disutility, most of the time it's not (just) because of the students' laziness, but (also) because of the uninteresting, boring, tedious, and/or sleep-inducing teaching style of the lecturer. By definition, a lecturer's main purpose would be to educate and pass on information. This not only means telling the information to the students, but also making sure that this information is received, digested, and comprehended. Teachers who end up coming across as boring and uninteresting, in other words, are not teaching very well. This is a problem that exists, and it is a problem which needs to be addressed. Proof of this is evident from the class registration patterns in UI's new system, where students can choose their lecturers. Lecturers with a reputation of boring people to death will generally get very little numbers of students registering, and even the few who do sign up usually do it because they need to take the course and were beaten to all the "good classes".

However, mandatory attendance requirements make it so that no matter what the quality of the lecturer, classes must still be attended no matter what. Thus, this removes the incentive for improvement in teaching skills and teaching styles.

In the end, mandatory attendance requirements, like all other acts of government intervention on a well-functioning market, will result in an inefficient equilibrium. Students will no longer experience full independence in decision-making, and thus will not be able to maximize their utility. In addition, lecturers whose classes are not very interesting will be "protected", meaning that there will no longer be an incentive for lecturers to improve their teaching styles in order to attract students. At the same time, it does not reward lecturers who do make the effort to be interesting and to teach well, because it would not show in the class attendance. Thus, it would not be wise to continue this policy.

What better solution for the sake of education than letting adults be adults and telling people who are bad at what they do that they need to get better?

Preventing slippery slopes

2008-03-09T21:50:00.004+07:00

I opened up an old issue of Time magazine this morning (and by old, I mean from January 28, 2008), and read an article on whether or not a double amputee (meaning, someone who no longer possesses human legs) should be allowed to compete in normal Olympic events, using technology which would allow him to run like a normal person.

The arguments against it: it would distort the notion of a level playing field, and would further blur the line between what is acceptable for sports competitions, and what is not. It would bring back the debate on whether performance enhancing drugs, taken at a non-harmful dose, would be acceptable for Olympic athletes. It would bring back the debate on whether or not aerodynamic helmets, streamlined swimsuits, and certain types of shoes should be allowed as well.

However, the most potentially harmful effect of this act, should it end up being allowed, is not in those first debates that will occur, but rather in the future debates for which it will definitely act as precedent.

The problem with rational, competitive human beings is that the incentive to win will usually overrule any and all forms of moral restraint. For example, if performance-enhancing drugs end up being legalized for use in Olympic events, the desire to win would translate to "out-drugging" other athletes in order to outperform them. This would inevitable take many (perhaps most, or even, God forbid, all) athletes over the safe dosages, causing great danger to them. If a maximum dosage limitation were enforced, all athletes would consume up to the maximum, because they know that other athletes would do the same, thus resulting in a situation identical to a situation without the drugs (absolutely no competitive edge for any individual athlete), except that everyone's much bulkier.

Thus, if performance-enhancing equipment were also made legal for use, it is inevitable that, given the bullet-train pace of technological progress, resourceful athletes would commision the creation of even better equipment, until in the end, the Olympic motto will no longer be "citius, altius, fortius" but rather, "equippius", if there is such a Latin term.

Basically, I do support human rights, and I believe that the right to compete in the Olympic games is one which should not be denied based on physical deformities or other personal impediments. However, the implications of allowing the equipment to compete is what I believe to be too dangerous to risk.

people Vs ‘People’?

2008-02-26T16:44:00.002+07:00

Lectures in public economics always warn us that whenever a government wants to make a good policy, it must make it the least trade-off generating since there is nearly impossible that a policy never hurts a part of society. I think this is the point of whole lectures I have got by far.

A government of a state is supposed to enhance its people welfare, no matter what kind of paradigm it takes, as Deng Xiao Ping once noted that the matter is not on the color of cat, but it is on its ability to catch mouse. Welfare here, of course, does include people enjoying great view and doing good sports in public park. However, its main task in enhancing welfare is not to let its people unemployed, as one of its main duty in its macroeconomy. When people can’t enjoy breathing fresh air and doing sports at public parks, their intangible welfare is reduced, whereas when they can’t have a certain job or even no job at all, their tangible welfare obviously reduced.

So, when the local government of Jakarta forcefully moved middle class entrepreneurs at several places in order to be replaced by public parks, as what they always had said, actually people are against others. What if what they said about replacement with public parks is not even closed to the reality which means this replacement-with-public-park thing is a bu*ls*it? I think when this happens people are against ‘People’ because when the government can’t keep their beautiful words, people can no longer have a good job as they had before, assuming that they can’t find better places, and at the same time the others can’t enjoy public parks what they had expected before, but the other ‘People’ can earn better, assuming that they now can find better places to work.

What does this public policy mean? Is it good or bad? Ah, I don’t know for sure which side to support, but as one who believes in rawls' fairness concept, I would prefer not to let this forced movement happen again in the future until the government can make sure that those small class entrepreneurs could have at least the same condition as they had before they got moved.

Saving lives vs. saving face

2008-02-17T10:52:00.003+07:00

If your president made an ill-advised promise, which would you prefer: for him to publicly apologize while retracting said promise, allowing his team of economic experts to actually conduct policies with short-term shocks but long-term benefits; or for him to save face while his team of economic experts are forced to devise sub-par policies with less long-term benefits and the same amount of short-term shocks? It’s crazy, really, how important image is. Clearly, the choice between retracting the statement and keeping it is no longer about economic and political stability, because the current policies are stirring up quite an uproar as well. So, must we really suffer more in the long term for the sake of our president’s image to the uneducated majority?

Beware of bubbles

2008-02-17T10:52:00.001+07:00

It seems that the greatest dangers to the world economy in recent years have come in the shape of bubbles. The dot com bubble; the subprime mortgage, C.D.O., C.D.O. squared, and C.D.O. cubed bubble; just to name a few. All are products of herd mentality and overhyped expectations. All were touted as hot prospects, and showed signs of explosive growth in terms of assets and, of course, profits. And yet, when one thing goes wrong, the bubbles burst. And when they burst, they take everyone along with them.

So, how do we stop these bubbles from forming? Do we try to lower expectations and calm down the masses whenever they get excited about the newest “hot prospect”? It would be difficult not to be tempted by the allure of what seems like spontaneously generating cash in your pockets. Granted, although the bubbles do eventually burst, they do make a lot of people very happy along the way. So is there something that must be done to save ourselves, or is the global economy, with its insatiable lust for growth, bound to face endless bubbles in the future? Only time will tell, but as a friendly reminder for next time you’re tempted to invest in the next big thing: beware of bubbles.

Dealing with prophecies

2008-02-16T08:59:00.002+07:00

One of the most fascinating phenomena that you can ever come across in dealing with the economic theory of expectations is the self-fulfilling prophecy. Deals are made and broken, companies flourish and crash, countries enjoy explosive growth and suffer from recession, all because of the power of expectations.

The logic behind self-fulfilling prophecies is simple: if someone makes a claim that an event will occur, it will influence the actions of their surroundings, which in the end will cause that occurrence itself. One of the most relevant examples in the world today is in the financial market. If a leading brokerage firm makes a prediction that a country’s economic performance will be outstanding for a given year, and that it would be the place to invest funds, then (regardless of the actual condition of the economy) people will be influenced by that prediction. People will start to invest their money there, based on the recommendations, causing a massive inflow of funds into said country. Due to the influx of money, economic performance will improve, which in turn will draw in more investors and more funds. By the end of the year, the quantity of funds drawn in will all but ensure an “outstanding” economic performance, as forecast by the brokerage firm at the beginning of the year. The reverse also applies, as perfectly demonstrated by the 1997 Asian economic crisis. All it took was one cry of “the Thai is falling” (yes, it’s a bad pun, and yes, I know it’s the Baht and not the Thai, but it would be less funny if I wrote the Baht is falling, and I’m writing this so I can write whatever I want, so there) to destroy not just Thailand but also many other Asian economies.

Why does this occur? Expectations. People make decisions and take action to maximize their inter-temporal utility based on what (they think) will happen in the future. If the government announces that tomorrow, gasoline prices will rise, everyone will rush to the gas pumps to fill up their tanks. If the newspaper’s front page headline is about an Enron-like scandal, within 1 hour the company’s stock prices will plummet because everyone decides to sell before it’s too late. When governments announce that they predict a jolt in inflation, people’s behavior will be influenced to actually cause that inflation to come about. This is what causes self-fulfilling prophecies. People’s actions become influenced by their expectations and predictions, or even by the predictions of others that they feel are credible, and in the end, those actions are what cause the predictions to come true.

I’ve been writing mostly about self-fulfilling prophecies in finance and economics. But, self-fulfilling prophecies do apply in other situations. A study by Diekmann, Galinsky, and Tenbrunsel (2003) shows that self-fulfilling prophecies also occur in negotiation processes. The study shows that negotiators who expect a very competitive opponent will subconsciously become less competitive themselves, causing lower negotiated outcomes for themselves, regardless of whether the opponent was actually very competitive.

I’m quite sure that this, to an extent, also applies to people in general and their outlook on life. If you had two people with the same exact qualifications, intellectual capacity, and skills, with the only difference being that one is a pessimist and the other is an optimist, I’m sure that the optimist will find that things happen in their favor more often due to the effect of their optimism alone, affecting both their own actions and those of people around them. Take another example of two completely identical people, except that now, we have a well-renowned public figure label one an “incompetent buffoon” and the other one an “impeccable genius”. Just as two identical countries would enjoy differing amounts of FDI based on labels and predictions, so would these two individuals in terms of the success they will enjoy in life. The “incompetent buffoon” is likely to never get a job offer in his life, dulling his mind due to inactivity and stagnating his work aptitude due to lack of experience, ultimately turning him into more of an incompetent buffoon than he was at the beginning. The “impeccable genius”, on the other hand, gets offers from everywhere, furthering his personal development and raising his intellectual capacity from the work experience. In the end, although he might not reach the level of “impeccable genius”, he’d be much closer than he was before.

So, until next time, may you always remain optimistic, and may all the right people say all the right things about you.

Carbon trading and toilet flushing.

2008-02-12T07:12:00.001+07:00

As I was thinking about what to write today, I remembered something that was said during a conversation an activist from an environmental NGO:

"Carbon trading is bad because it's like this: you defecate in the US, but instead of flushing your own toilet, you pay someone else in Nigeria to flush theirs. It just doesn't work. Emission doesn't go down."

While, I guess, you can find some merit to the analogy (countries should take responsibility for their own waste), I really do think that such a line of logic doesn't apply to carbon trading. It would be true with waste that had only local impacts, such as oil spills or liquid waste dumped in rivers. However, the largest impact of carbon emissions is in a global scale, i.e. carbon emissions from the US do impact Nigeria in the end, and vice versa. So, in the case of carbon emissions, flushing Nigeria's toilet does pretty much the same thing as flushing the toilet in the US. Whoever flushes their toilet, it will still lead to the same thing: global levels of emissions decrease, the world is slightly better off. Carbon trading is a mechanism that ensures the existence of an incentive for both Annex 1 countries and non-Annex 1 countries to keep flushing their toilets. (yeah, yeah, I'll stop with the toilets now)

Conversation didn't stop there, by the way. It continues below:
"Carbon trading doesn't work because there is no way to accurately calculate current levels of emission per country and per company, and no way to accurately calculate the amount of emission reduction, thus resulting in an inability to create a market price that represents all of that. Look at the ETS in Europe. It crashed because carbon was too cheap and no one needed it!"

Shortcomings in emission calculation don't only affect carbon trading, but also carbon taxation and other methods of emission reduction and climate change mitigation. Also, while it's true that the shortcomings in calculation will hinder the effectiveness of carbon trading, it doesn't mean that conceptually carbon trading is a bad idea. In fact, what are the EU doing now? They're not abandoning the ETS, they're improving the calculation methods, resetting emission quotas, and trying to make the technicalities and the mechanism work better, because that's the reason why it crashed. They allocated too many permits, arguably set the emission cap too high, and thus the carbon permits were oversupplied and underdemanded. But the fact that emission permits were not purchased despite the dirt-cheap prices shows positive signs, actually, because it means that companies and countries in the EU are able to reduce emissions at a very low cost, lower than the cost of purchasing those dirt-cheap emission permits. Again, nothing at all leads to the conclusion that carbon trading is a bad thing.

So what does everyone have against carbon trading, anyway?

Corporate Social Profits

2008-01-24T17:40:00.001+07:00

Much has been said about corporate social responsibility. Milton Friedman opposes it wholeheartedly, arguing that corporate social responsibility takes away from the corporation’s main responsibility to its shareholders. On the other hand, consumers, as well as the general public, applaud corporate social responsibility, pledging their support to companies that give back the most. The Economist has even published a special report on it, containing pieces about the current trends of CSR (especially the huge amount of momentum gained from climate change) as well as the effectiveness of CSR for profit-generation. Apparently, recent research has shown that CSR is only weakly correlated to profits, although the correlation exists. Furthermore, the issue of causality remains a mystery. No one knows for sure whether greater profits lead to greater nominal expenditures for CSR, or if it’s actually the other way around.

The questions that arise then: If CSR isn’t profit-maximizing, why do companies do it? If CSR is indeed a ploy to gain profits, does that necessarily make it a bad thing?

Corporate social responsibility is perceived by companies to have a beneficial impact on the company image. A company with generous expenditures for CSR is more likely to get positive publicity from the general public, and is less likely to find protesters storming the front gates, calling them “bloodsucking, power-hungry capitalists who exploit workers in sweatshops for the sake of profits”. Although it might not affect profits that significantly, because the addition revenue from additional customers may not exceed expenditures for CSR (thus creating a loss in profit margin rather than a gain), but a good corporate image is never a bad thing. Although profit margins may decrease by a little (and remember, they might not), one can assume that a good corporate image grants the benefit of stability, as opposed to the volatility of stock prices and revenue which doubtless has been experienced by every company that has ever faced a mob of angry protesters. This may grant long-run benefits, and would be profit maximizing for the long run.

Secondly, so what if CSR is just a marketing scheme or a publicity stunt? Even if it is, it’s a publicity stunt that benefits the people, and has more positive impacts than TV advertisements will ever have, so as far as I’m concerned, if companies really are considering the use of CSR projects to draw in more customers, it would be much better to encourage those than to limit their advertisements to just posting billboard ads and running jingles on the radio.

So, what’s wrong with CSR, anyway?

Multi-Level Malice

2008-01-09T22:02:00.000+07:00

I was somehow tricked into attending a multi-level marketing introduction session. I was told it was going to be a focus group discussion for a project created by the Ministry of Trade, based on small scale businesses. I was told there was a project being made by the Ministry of Trade where outlets are created to house goods made by small home industries, in order to assist these small businesses with sales, promotion, and distribution. Thirty seconds into the presentation, I figured out that I’d been duped. It was a multi-level marketing promotion session.

Rule number one of trying to attract someone into doing something you ask them to: don’t lie to them. Lying to someone is like defecting in a continuous game called “trust”. Once your “opponent” defects, you’d have no more reason to continue
cooperation with them, and you’d always be predisposed to suspect them in the future.

The presentation went on and on about the potential of participating in this system. If you got to the level of “business scale 2”, you’d stand to make IDR 100 million per year. If you got to “business scale 4”, you’d get IDR 41.7 million per month! Fortunately for Eisha and myself (I forgot to mention that I had accidently dragged Eisha along to that meeting with me, sorry for that), we’re economist. We know that with those numbers, also come odds. Those odds were made more obvious when the presentation continued with testimonials of success stories by the boatload, along with a whole leaflet filled with pictures of couples who had made it to the highest business scale. While the presenters obviously believed that showing these success stories made the dream seem more accessible, Eisha and I are a lot smarter than that. The sheer number of success stories means that each of these hundreds of people have recruited hundreds more under them. Furthermore, all of those hundreds recruited by the top-level members are (pardon the language) busting their asses, trying to catch up. What does all of this mean? First, the number of people still available to be recruited has greatly diminished. Second, the number of your competitors in recruiting is constantly growing, or even multiplying. Third, the odds of finding dead ends (people who just aren’t interested, people who’ve tried MLMs and met with failure) also continue to increase. So, while the large number of success stories make it seem like the odds are good, it actually means that the odds are significantly lower than they were at the beginning.

Finally, the main hook: a seminar, held in a few weeks’ time, and they wanted all of us to attend. Their reason: “if you don’t buy the ticket now, we’ll nag you until you do”. Great marketing plan, but it unfortunately just screams out “restraining order”.

For those of you who are actually into MLMs, that’s fine. But for those who are still questioning whether or not to join, please heed my words carefully: don’t be fooled by the presentation. See the logic and underlying rationale beneath it all, and then decide.

Climate change mitigation in Indonesia (or the lack thereof)

2008-01-09T22:01:00.000+07:00

Apparently, Indonesia is the only remaining country in South East Asia that hasn’t succeeded in implementing a single CDM project. Apparently, Indonesia actually went up in rank for the highest emitter of carbon (from fourth to third). Apparently, we’re still cutting down our forests faster than we can say “Timber!” and we’re still driving our huge, gas-guzzling SUVs in order to maintain our “urban lifestyles”.

Why is that?

Is it the people’s fault for being so unaware, apathetic, or just plain ignorant of this huge global issue, despite the relatively recent international conference in Bali on that exact problem?

Or is it the government’s fault for not creating any sort of incentive scheme for the transition process?

Petrol is still subsidized, making biofuels or any other type of alternative energy development unprofitable due to the uncompetitive prices. Carbon taxes and other types of “sin taxes” for emission and pollution are basically impossible to implement in the country with such a high rate of tax evasion. Most importantly, businesses trying to implement CDM-based projects are shrugged off by local governments because, apparently, CDM-based projects involve less money, thus meaning that there’s less money to go around in forms of “administrative expenses”, i.e. bribes and such.

So, third highest polluter in the world, second most corrupt in the world, and apparently the former won’t go away until the latter does. Well, the people can still try to change things around for themselves by voluntarily cutting down on emissions and switching to energy-saving measures and alternative fuels. But, why would they want to do that? It creates a huge hassle in their lifestyles, and since everyone knows that their own personal effort won’t make a difference, and that there is only a very slim chance that people around them will follow suit if they do start to do something, then they just don’t do it altogether.

Well, whoever’s fault it is, we’re doomed. Unless, that is, we can find a way to change.

$100 Oil Prices: What now?

2008-01-09T22:00:00.000+07:00

The so-called “psychological price level” of USD 100 has been breached. Yet, the reaction towards this occurrence is nowhere near what it was hyped up to be. Business continues on, as usual. No sudden panics occurred anywhere. It really does make you wonder what the big deal was to begin with.

I guess, the visible lack of panic (or even any other reaction showing worry or anxiety, for that matter) shows that people are smart enough to realize that $100 is just $1 more than $99, and that people are able to cope with the rising price better. And I guess, in terms of political and economic stability, that’s a good thing.

However, does this lack of reaction signal a slow transition from fossil fuels to alternative energy? If people are insensitive towards oil price changes, then there won’t be a substantial change in behavior. If there’s no substantial change in behavior in terms of energy use, then there won’t be a transition towards alternative energy. And that is definitely a bad thing, no?

The African Enigma

2008-01-09T21:59:00.000+07:00

Currently, many African dictatorships have run “democratic” elections that are faked or rigged in very obvious ways. The countries’ leaders pretend to have a sudden change of heart regarding democratic values. They publicly hold speeches on embracing a more democratic future for their country, and they promise to run fair elections. And then, when the voting begins, so does the obvious sabotage. Ballots in favor of opposition candidates mysteriously disappear, or reappear with the numbers changed. Numbers of ballots suddenly exceeds the number of registered voters. These occurrences, along with many others, have been the spotlight of the “democratic” elections occurring throughout Africa. Also, we might be familiar with these occurrences because that’s what may or may not have happened during the New Order, i.e. President Soeharto’s reign of power.

My question: why do they even bother? Rationally speaking, people do things only if they feel it would be beneficial for them. Now, what benefits would running fake elections bring?

Firstly, if they do it for the sake of shrugging off the UN and its constant pressure to move African nations toward democratization, they’re not fooling anyone. Although fake elections may have worked 30 years ago, when international monitoring was more limited, they definitely won’t work now. There are way too many watchful eyes nowadays, be it the UN, NGOs, the media, or even just countries with a vested interest or ulterior motive, and each of those set of eyes comes with not only tenacity but also the equipment to match. End result: as I said before, they’re not fooling anyone.

Secondly, if they do it for the sake of satisfying their people’s thirst for the democratic process, the media coverage on the fake elections should be enough to lift the blindfolds from the people’s eyes, allowing them to see the truth. Thus, they’re not fooling the people either.

So, what are they doing it for?

Remittance agencies as an indicator of banking inefficiency?

2008-01-06T20:58:00.000+07:00

Another thing that caught my eye, in the special report of the most recent Economist on migration: remittance agencies are the most commonly-used tool for international money transfers.

The simple reasoning behind: banks take too much time. The mechanism implemented for transfers between banks across borders apparently takes as long as 2-3 weeks to finish. Remittance agencies, on the other hand, take 20-30 minutes. Doesn't take a genius to do the math on that.

The question that pops into my head is: if remittances made by immigrants to their home countries adds up to almost USD 300 billion per year, why aren't the supposedly profit-oriented banks interested in upping the level of efficiency to recoup this lost market share?

Or is it just that hard to do it?

Taxing poles.

2008-01-06T20:28:00.000+07:00

I just picked up a copy of the newest Economist today.

Apparently, the government of Texas needs funds to pay for the treatment of sexual harassment victims. Apparently, they want to get the money by taxing strip clubs, specifically by charging a $5 entry fee to its patrons.
The logic behind it? Strip clubs and sexual harassment both objectify women and violate their rights, thus it's a justifiable tax.

To me, it really does sound like a misplaced punitive tax. Taxation creates a disincentive for patrons due to the higher prices. Thus, imposing a tax on strip clubs makes it seem like the government is trying to dissuade patronage from these establishments. For no real reason whatsoever, I might add.
It's like imposing extra taxation on fancy restaurants to help fund soup kitchens because they both involve food.

As the tagline states, "a good cause, but a bad policy". Couldn't have put it better myself.

Becoming a High-profile Person Could Be Good for You ?!

2007-12-26T15:27:00.000+07:00

As Keynes said, “all economists must be humble…”. Humble = low-profile. What are the characteristics of a low-profile person? These can be compiled into four words, ‘No Talk Action Only’ (NTAO). Actually, what does low-profile imply? When a person is considered as a low-profile person we would think that he is just humble and dislike showing-off neither his abilities nor his belongings that are likely to have higher value than ours. Most of us like those people. They affirm a saying ‘silence is gold’.

However, should we be low-profile persons all the time? A low-profile person could reflect two things. First, this person is kind yet superior in most of things what ordinary persons have. Second, this person is kind yet not that superior. The later reflection could be interpreted as a risk-lover person because, as what characteristics tell us, when this person tries to do something and then he fails, he won’t receive a lot of booes from others since others would perceive his capability is compatible to his silence.
He is safe. Anyway, this could cause two impacts.

First, he will strive for the best he could reach so that he could prove that he is not that bad. Second, he will be depressed and just take his incapability for granted and remain not that good. The later one is bad!

What about a high-profile person? Most of us don’t like this person because this person enjoys showing off his plusses (the real ones) to others, while sometimes this person is not as good as what he tells, which could be compiled into ‘No Action Talk Only’ (NATO). This attitude can cause bad and good impact. The bad one is when he likes talking a lot what he is actually not able to carry it out would make his track record look bad. He will find difficulties to get trust from anyone. However, this could bring good effect, as well. When this person likes talking a lot, he could feel challenged to prove what he has said, and sometimes he deliberately does this to push him to gain his max performance. This person could be said as a risk-lover person because he risks others’ perceptions on him. If he fails, others’ perceptions on him would be bad, but when he succeeds he would accept good perception, that is ‘talk a lot, prove a lot’.

Looking at both sides effects, low and high profile ones, which one do you prefer to be? Before you have to choose, I just want to remind you that high risk, high return. Anyway, if I am allowed to suggest, I just want to say that becoming a high-profile person could be good for you.

Warning: Excessive Flirting May Be Bad For You

2007-12-08T09:12:00.000+07:00

In his song entitled “Imma Flirt”, R Kelly proudly flaunts the fact that he is a “flirt”, or therefore someone who flirts frequently. However, is this something to be proud of?

Let’s try to consider what being a “flirt” actually does to someone’s chances of winning in the flirting game, i.e. actually getting a mate (or at least, a date). Flirting frequently can be done in two ways: flirting intensively with one “opponent”, or flirting with many “opponents” in a short time span. We’ll be analyzing both, but let’s do it one at a time.

First, the intensive flirter. Let’s say that the probability of a woman accepting the offer of a date/relationship/marriage (let’s just make this simpler, with us analyzing the males who are usually the first movers and initiators of flirting) is a function of the woman’s perceived grade of the man, and the man’s efforts to win her over. Being positively influenced by both, it would make sense that the more intensively a man flirts with the woman, the more likely she is to accept his proposal when it finally comes. However, intensive flirting can also act as a signal of desperation, because those who need the most will try the hardest, thus overly intensive flirters run the risk of being viewed as desperate, thus lowering the woman’s perceived grade of the man. And, due to empirical proof (based on my own personal experience, friends’ experiences, and conversations with women), women find that desperate men are not very attractive, thus it would be a significant blow to the perceived grade. So, does being a “flirt” in the intensive sense actually help a man’s chances of getting a woman? Not really.

Secondly, the “portfolio diversification” flirter. In economic theory, it’s always good to diversify your portfolio in order to even out the expected gains and losses and smooth out your income. I suppose, for women, it also works. By flirting with more than one woman at a time, a man can increase his probability of getting a girlfriend, because if he fails with one woman, he always has his plan B, plan C, etc. However, the risk that is associated with diversifying flirting targets is also great, because if any of the women find out about the man’s actions, it is a huge signal implying that the man isn’t really interested in them, but is more interested in just getting a girlfriend, period, regardless of who it ends up being. This, obviously, will damage the perceived grade of the man for all the women he was previously approaching. So, being a “flirt” in this sense also hurts more than it helps.

So, in conclusion, R Kelly should thank his lucky stars that he, as he also claims in his song, is “black, handsome, rich, and can sing”, because being a “flirt” is definitely not what’s getting him all his women.

Something Wrong with Liberalism in our Tv Shows?

2007-12-06T17:44:00.000+07:00

Freedom experienced by media, in terms of Tv shows in Indonesia has been bigger since the Soeharto's regime. You may find shows that critize the government, no more 'dunia dalam berita', more sinetrons, etc.. at any channel. However, has this been positive effect to our media broadcasting world and, of course, to us, as consumers?

What are the impacts? Today, every time I want to kill times by watching television, I would find craps, such as abundant infotainments, from early in the morning shows (in the morning?!) to the late shows, teenage-love story sinetrons, which show off wasteful luxuries and violence (the very typical ones), illogical mystic stories, effortless quizzes, and many 'defect' shows more..

One direct question across my mind is why a very few stations have had good tv shows, even though they know that this would bring bad effects to Indonesian? I know it’s profit, but then why most of Indonesian like it? Has it become usual business, so we have been accustomed to these?

However, do the stations have willingness to enhance their quality of shows (educated)? Well, I think they have, but they are just afraid not getting money from commercials if they turn to broadcast educated shows since based on survey 'we' still like sinetrons and alikes and if a few of them are aware to turn to those educated shows, the others may not do the same thing, and they will incur severe loss due to this unpopular decision. No?

The next question is, until when we see this disappointment? How can we prevent to deeper demoralization and logic-reducing situation? About one year ago, there was a demonstration against WWF smack down because it affected children to act violently. The result was the station stop the show. But, how come people have not conducted demonstration against uneducated shows, like sinetrons and their comrades? Bang Dede ever explained to me in an occassion that 'if you want to bust sinetrons and alikes, you should just let this condition (free to choose shows) go on to its own, because people would automatically demostrate it when the shows have threaten their lifes (moral)' It's true that they can have demonstrations against it but if the shows have been ingrained in their minds as usual business, they wouldn't do it, no?

Can I say that this is because of excessive liberalism that our media not supposed to have yet? No? A few experts dream, if I may say so, to have stations to have discovery channel and scientific shows, etc.. Why I call them dreamers? Because I think it would not happen since stations would most likely to incur loss if they ‘insyaf’ to have those educated shows based on my reasoning above, while if they collude to broadcast these shows, they would still grab profit, after all.

So, should the government intervene and limit their freedom for a period of time or what?

How do we really decide how many kids to have?

2007-11-30T20:35:00.000+07:00

This post originated from a minor discussion during labor economics class.
We were discussing Todaro's theories on demand for children, where Todaro argues that the demand for children is determined by:
1. Preferences toward children, both as consumer goods and as investments (positively linked)
2. The infant mortality rate in the country (positively linked)
3. The opportunity cost and actual cost of having and raising children (negatively linked)

Immediately, I felt something was wrong.
The higher one's preference towards children (for whatever purpose), the more children that person will want to have. This makes sense, logically.
The higher the opportunity cost and/or actual cost of having children, the less children people will want to have. This also makes sense.

Now, the part that bothers me is the second point: the higher the infant mortality rate, the more children people will have.

Why does it bother me so much? Because the arguments about preference and opportunity cost cannot coexist with this last proposition. Why is that?
- A high infant mortality rate means that the opportunity cost for having and raising offspring will become higher. More effort needs to be put into having a child and making sure he/she survives until their older years. Parents will dedicate much more time taking care of their children, and will need to spend more time making more children if their current ones don't make it past their infancy. Higher opportunity cost should lead to less children, no?
- A high infant mortality rate means that the actual cost for having and raising children also becomes higher. More hospital expenses, more nutritional supplements needed to keep both mother and baby healthy, etc. Higher actual cost should also lead to less children.
- A high infant mortality rate means that, for the purposes of investment, children are no longer a sound one. The high likelihood of death for children, especially infants, means that they often don't survive until the productive ages when they can help support the family financially. Thus, once again, this should lead to less children.

From the three points mentioned above, we can conclude that infant mortality rates should be negatively correlated with demand for children, and thus the crude birth rate.

However, although this logically makes sense, empiric evidence seems to prove otherwise. Declines in infant mortality seem to cause a decline in birth rates for the following years. This implies a positive correlation.

So, why does this happen?

I think, Todaro didn't get it fully wrong, because the points of preference, opportunity cost, and infant mortality rates, all play a part in determining the demand for children, just not at the same level. What I mean is that individuals or couples enter the "market for children" with an already predetermined number of children that they want to have. This number is chosen based on factors such as preferences and opportunity cost. However, once they enter the market to actually have the children, this number is no longer subject to change. This is why, when faced with high infant mortality, parents will keep having children until they can get the number of children that they want to survive beyond their childhood, and with low infant mortality rates, parents don't have to try as hard to fill their "quota", and thus crude birth rates decline.

Well, but I don't really know what I'm talking about. So, what does everyone else think?

Motives, motives, motives.

2007-11-29T06:42:00.000+07:00

About one or two years ago, there were no events made by governments, NGOs, or university students concerning climate change.

Now, after Al Gore's nobel prize, Sir Nicholas Stern's famous review, and with the Bali COP only three weeks away, Climate Change is the new hot issue, popping up in seminars everywhere.

Is this a sign of raised awareness, or just a sign of event organizer opportunism? Which is the larger incentive in the formulation of an event's theme: substance and ideals, or popularity?

Setting the theme based on substance and ideals would mean that the organizers enjoy the utility of being psychologically satisfied, knowing that they've attempted to raise awareness and public knowledge on an issue they believe to be important. However, setting the theme based on issue popularity sells tickets. Tickets lead to profits. Profits lead to event sustainability.

So, which is it? Are the Indonesian NGOs, government, and universities really becoming more aware and more attentive to climate change, or are they just finding ways to raise profits?

Searching for that perfect seven

2007-11-28T09:27:00.003+07:00

Robert Frank writes in “The Economic Naturalist” that people usually search for mates who are at the same level as them. This means that if someone’s quality could be quantified on a scale of 1-10, men with a rating of 7 would end up pairing up with women with a rating of around 7 as well, whereas the 8s would pair up with 8s, 9s with 9s, and 3s with 3s. But do they really?

We hear all the time that people are always searching for “the perfect mate” or, in other words, someone who they perceive as a 10. There are also many other cases where people end up marrying someone who was previously thought to be “out of their league”. Someone perceived as a 7 could have a wife who is a solid 9, and vice versa. However, for every success story comes also the story of failure, where men who perceive themselves as 8s or 9s try to chase women who are also “at their level”, only to fail horribly.

All of those things mentioned above highlight the one main problem with Frank’s hypothesis: perception. How do we quantify a person’s qualities? How do we differentiate between an 8 or a 9? How do we generalize what kinds of qualities warrants a 5? What exactly does a perfect 10 look like? These questions are all unanswerable for one reason: every individual has their own taste, and thus the subjectivity biases are so great that no reliable rating system can exist, because the rating system would never be representative to every part of society.

Another point is the time-inconsistency of that perception, and the time-inconsistency of people in general. A man could marry a woman who he perceives to be a perfect 10 (which might be due to certain subjectivity biases, which poses yet another problem), but after three years of married life realizes that he’s unhappy with his marriage and that his wife is only a 6.5. A woman could turn down or break up with a man who she perceives to be a 7, but three years later, after he enrolls in a fitness program and gets a high-salary job, he becomes a 9.5, completely out of that woman’s league.

So, how do we search for mates? Do the 7s have to start our search for “their perfect 7”? Or should we all continue our relentless search for the perfect man/woman? Does the “perfect” man/woman even exist?

Just when we thought we could rationally analyze love and relationships, we’re once again proven wrong.

Steady off or Worse off

2007-11-24T09:50:00.001+07:00

I was imagine, that people are really lose aversion refers to economic behavior??
My university-level instructor said that people are lose aversion, its means that people prefer choose to not lose X unit than get X unit. I believe that, my friends believe that, and other must believe that.

But in some case, i was imagine : its really people prefer(more satisfaction) not lose X unit than get X unit?? lets take the case. If someone lose Rp. 50.000, and after that his parents or girlfriend maybe give him Rp. 50.000. Do you think, he should be steady off or worse off???

Rate of Return of the Investment on Human Capital

2007-11-23T01:15:00.000+07:00

>>>Did you ever noticed that our campus can be so beautiful ?

>>>Did you ever notice the positive externalities the environment of our campus provides ?

>>>Have you ever considered maybe without the externalities our grade won't be that great and even we won't be ready for the post-campus life ?

A very good friend of mine said how lucky I am being one of a very limited amount of people having the right to bear the HUGE and IMPACTFUL status as a student of University of Indonesia, the only university granted the name of the whole nation !!! (which is in economics, this can be considered as another positive externality ).

By receiving so much positive externalities, we get even higher social benefit than we actually pay back. We are community's investment. Therefore we should realize also that as a means of investment, we should give return to the community back. In long run, this return can take forms of more economy's output, more job creation, less inequality, more accummulation of wealth (which further leads to structural transformation). I'm questionning, is it possible to count the rate of return of such human capital investment ? and is it possible to produce an approach to count the multiplier effect of every increase in the investment on human capital to the increase in economy's growth or welfare ?

Maybe, this could be the answer to the pro-cons about the constitutional requirement that the government should allocate 20% of its expenditure to education each year..

When I’m in a bus Part I

2007-11-20T22:19:00.001+07:00

For all men: Don’t expect too much for a beautiful woman to sit next to you!

I am used to taking an air-conditioned bus as my transporter to campus. I prefer it to train, even though train takes a less amount of time. There are several advantageous taking bus that I can’t have if I take the train. One of them is that I can take a glance at beautiful women. I am quite sure that beautiful women like to take bus more than to take train, since there are numerous disincentives for taking train, which one of them is sexual harassment.

Of course as a straight man, I would expect to be sitting next to a woman, thank God if I could get the beautiful one, in a bus. Consider it as a relaxing entertainment before or after squeezing my brain. Actually, most of the time, I like to keep it idle. Anyway, calculating probabilities for a beautiful woman would sit next to me; I always go to campus with a huge expectation for this chance. However, as I take bus to campus for about two years I have found that middle-quality-looking women would usually avoid sitting next to men, let alone beautiful women.

Why? Psychology tells us a really useful knowledge that would prevent us to brood at this very really rare opportunity, that is people would be more disappointed to lose something than to gain something!

Women, the less attractive ones, would rather sit next to a woman than sit next to the opposite ones because there would be too risky of being flirted or asked for ‘meaningful’ questions that might tend to a sexual harassment. This would make her day blue, while it could make a special day to her getting a cute acquaintance. But, what if there is a cute guy in the same bus with a beautiful woman? I think it’s still a very rare opportunity to get. Won’t she try to find him? Every time she takes a bus? I don’t think so as her opportunity cost to find him could be bigger than what she might get. Is that why a beautiful woman has never sat next to me? Hehehe..

So, for all men expecting beautiful women to sit next to you, my suggestion is just cross your finger every day since I think only God who can arrange it because a beautiful woman has higher risks than the ordinary ones. After analyzing this phenomenon, I guess I have figured out what has been the cause of my lack-of-spirit days recently.

Is Jennifer Aniston that Irrational?

2007-11-16T23:35:00.000+07:00

Few months ago I was astonished as I was reading entertainment column in KOMPAS. Those paragraphs told more or less like this. Jennifer Aniston said that she was determined to change her way of taking bath. She used to fill its bath tab full of clean and fresh water every time she took a shower, but now once global warming and environmental issue was in the air, she felt guilty for being an easy-spending water person, while miles away from her house there are African people can’t take a bath twice a day or even one due to their limited access to clean water.

I was admiring about her unselfish and empathy behavior, but I thought about her changing again. Does it really give positive effect to Nzogbias in Africa there? Well, I am not an expert in this water thing, but my ordinary logic said she would not improve African access to water! Another Drogba would still have to think ten times to take a bath twice a day because it will incur big opportunity cost if he decides to do it. He must reduce his drinking!

It’s a simple logic. Couldn’t she think about it? Was she irrational or just being a beggar for lights for her comment? Where was she ten years ago, for example, when this issue was still in the progress, while African have for years found difficulties to take a bath?

Is that Really Damn Hard?

2007-11-16T23:34:00.000+07:00

In the late several years, most economic pundits like to talk about unhealthy, uneven Indonesian economic growth. A few days ago KOMPAS, which I think is a natural monopolist for general newspapers, posted this issue as their headline.

There are some causes why Indonesia has generated unhealthy economic growth, but this posting just wants to talk about its uneven development among regions. The past government liked to put its limited attention only to develop Java because of its ability to boost economic growth of Indonesia. They wouldn’t like to develop NTT, for instance, and other less beneficial regions, whereas most are in severe conditions. Two or three years ago, there was a staggering fact, that is revelation of the case of famine in NTT, when on the other hand we in Jakarta could eat a lot anytime we want. What’s wrong with this? Has not the govt considered about them? They are Indonesian too!

My parents had me (the government) to give fair proportions of a bundle of candy (attention of development) to my two little brothers, Otong (java and other economic-boosted regions) and Polan (NTT, NTB, and other less economic-boosted ones), given a certain amount of time (a one fiscal year) and incentive (more even development) if I can handle it well. I, of course want to get the incentive, but consider the situation here. Otong is a handy (easily developed) boy. He likes to help me most of the time more than what Polan does. Polan, on the other hand, is a spoiled boy due to his sickness (hard to develop). What should I do? Social psycho tells me what I should do. There are three criteria to determine my choice. They are equity, need, and contribution criterion.

I can’t ignore my feelings from what their deeds. Otong attracts my attention a lot so that I would love to give a bigger proportion of candy to him. However, Polan is my brother as well, let alone he is in a bad condition. As his older brother, I must not do this, but ahh…... I think I’m in ministers’ shoes. Please help me, which criterion I should choose?

The value of a PhD in Financial and International Economics?

2007-11-11T04:52:00.000+07:00

Since the majority of writers here are taking one of those two majors, I just wanted to give a heads up with this blog post by Dani Rodrik.
An excerpt:

Economists have many elaborate and beautiful models of currency determination, but they do a terrible job explaining or predicting currency movements over any reasonable interval. Most of the time you are better off flipping a coin than having a Ph.D. in financial economics.

I'm just curious, how many of our readers believe this to be true. Please comment?

Safe = suboptimal?

2007-11-08T20:32:00.000+07:00

I stumbled upon this article (HT:Greg Mankiw), and it immediately got me thinking. Do manager habits of risk minimization always lead to worse or less efficient outcomes? If so, does the stress associated with failure inhibit manager performance?

Then, I Googled up the term "mistake phobia" and found this.

In theory, risk aversion is defined as a condition where an individual would prefer a lower yet certain gain over a higher gain with a risk. A person who would prefer being given 5 dollars rather than have a 50-50 chance between getting 20 dollars and 0 dollars (with a certainty-equivalent value of 10 dollars) is classified as risk averse. Other classifications are risk neutral (always chooses the highest certainty-equivalent value) and risk loving (prefers risky gains to certain gains). Here's a further explanation.

Now, all of this is fine when it only involves the individual, because whatever his choice, he maximizes his utility according to his preferences and his view towards risks. But what happens when risk aversion happens when the stakes go beyond the individual?

Take the example of the (American) football coaches in the first article. David Romer argues that the main motivation behind the coach's choices is "not screwing up and getting fired", rather than "win", the ideal motivation that the owners and supporters hope the manager has, which means that the coach is acting against the team's best interest. Thus, the result is plays that are conventional, orthodoxed, and safe. The result of these plays? As Romer's research suggests: suboptimal. This, by the way, is worth further researching, perhaps the effects of job pressure on tactics employed by English Premier League managers, or something of the sort (might as well do some research on what the rest of the world calls football). Whoever ends up doing this research, please give me a call or at least a thank you note, hehe.

So, do risk averse managers result in suboptimal outcomes for their organizations? There's too little information available to draw conclusions, because although it's been proven for football, I can't say for certain that the same applies on the corporate level.

But, what I can conclude is that job pressures cause risk aversion, which in turn creates a preference for the "tried and true" over risky innovation. It does create some interesting questions concerning management, no?

Are arms races really all that bad?

2007-11-08T19:17:00.001+07:00

Arms races are conditions where competing parties all strive to match each other's advancements in order to remain competitive, resulting in large amounts of resources being squandered with no real gain to the competing parties themselves. I'm going to take a few examples of arms races that were brought up in The Economic Naturalist, such as why women endure wear high heels. Women wearing high heels is the impact of an arms race in attempting to grab the attention of men, where individual women who wear high heels are more likely to attract men than women who wear flat heels because high heels make the women seem taller and also create a more attractive figure, but since all women end up wearing high heels, the advantage of wearing high heels is lost. Another example is students taking extra lessons outside of school in an attempt to raise their chances of being accepted to their target universities, an attempt which becomes futile because when all other students follow suit, the advantage also becomes lost, and the chances of those individuals being accepted into their target universities reverts back to the original point.

Why do these competitors engage in arms races rather than collude, agreeing to stop wearing high heels or taking extra lessons, thus reducing the total amount of squandered resources? The answer is because the threat of an individual breaking the agreement is significant enough to deter the group from attempting to collude. If all women agreed not to wear high heels, and one woman suddenly decided to wear high heels, then that one woman would gain a significant advantage over other women in attracting men. The same outcome would occur if only one student took extra lessons, giving him/her a larger chance of being accepted into the university.

The end result? Women with aching feet after enduring a whole day of wearing high heels with no benefit in terms of attracting men, and students who spend hundreds of dollars on their extra lessons while realizing that his chances of getting into an Ivy League university haven't improved because everyone else in his class is also taking lessons.

Thus, the conclusion that I drew from reading The Economic Naturalist's take on arms races: arms races are bad, inefficient, and disadvantageous to the actors. However, is that really the case? Do arms races really cause a net negative? My view: not when you factor in the externalities of the arms race.

I'm sure men all over the world are happy that women wear high heels. Although no individual woman changes how she looks in relation to other women, the arms race leading to all women wearing high heels makes women look better as a whole. Instead of having all women wear flat-heeled shoes and only look nice, the arms race makes all women wear high-heeled shoes and look fabulous. Thus, net benefit for men.

Students engaging in the educational arms race may not end up raising their chances of gaining entry into their target universities, but all universities end up gaining benefit because there is an increase in the overall quality of applicants. The same applies to the labor market, where the "college degree" arms race, which is slowly escalating to a "master's degree" arms race and will eventually reach the "PhD" arms race, creates a net benefit for the employers, despite the fact that the applicants themselves have to endure the exorbitant cost of education in order to gain no advantage whatsoever. If all new entrants to the labor force agreed to stick to their high school diplomas and apply for jobs right away without going to college, the chance that each individual has to get a job would be exactly the same as if they all went to college first. However, the employers would be much happier to select their employees from a bunch of PhDs than from a bunch of high school dropouts, because it would lead to higher quality of work and higher labor productivity. Thus, net benefit for employers.

Finally, the largest example of a positive benefit I can find from an arms race: perfect competition. The equilibrium market share of two firms under a Bertrand duopoly would remain the same, regardless of whether they colluded or decided to compete with each other. This is true because market share would not shift between the two firms if they both set the same price. Collusion results in prices being set at a point where both firms gain profit, while competition within the duopoly results in prices being set equal to marginal cost, which leads to a zero-profit condition. Obviously, both firms lose out by competing instead of colluding. However, the consumers are much, much happier. With firms under the condition of price-taking, it leads to lower prices which increase consumer buying power and raises their levels of utility.

So, it's not really all that bad, right? Well, provided that you're on the right side of the arms race.

Until next time, may you find yourself being the target of an arms race (such as having two men competing to win your affection, each sending you a dozen flowers per day) rather than the actor (one of the poor guys who has to spend all his money on a dozen roses to keep himself from being outcompeted).

Economics of Jaywalking

2007-10-31T21:53:00.000+07:00

Intro: I hate jaywalkers.

Problem: Jaywalkers are everywhere in this country. People seem to cross the street wherever they find to be convenient for them. Not only does it cause drivers to have possible heart attacks and other stress or shock-related occurrences, it can also cause traffic accidents, dealing bodily harm to both pedestrian and driver.

Cause of problem: Absolutely no disincentive to cross the street at the designated crosswalks / pedestrian bridges. It's a disutility to search for the bridges or crosswalks because it takes time, and pedestrians are usually well-protected by law and by societal paradigms, should a traffic accident occur (it's always the driver's fault if a car hits a pedestrian, apparently), thus the pedestrian is never held accountable if anything bad happens. As for the obvious risk to their lives and their well-being, they consider the odds to be so small that the disutility is negligible.

Proposed solution: The United States has tried fines, and it works quite okay. But let's get creative. Why not make a regulation where motor vehicle drivers are held free of any liability if they hit a pedestrian who did not cross on the designated crosswalk, and all fault is placed on the pedestrian? And, of course, we'd need to couple this with the construction of more pedestrian bridges and the painting of more pedestrian crosswalks in streets. Security cameras or increased number of traffic cops wouldn't hurt, either. With this policy in place, motor vehicle drivers would not feel any need to slow down to avoid hitting jaywalkers, except at designated crosswalks. Because of that, jaywalkers would be discouraged from crossing, because they are no longer protected by laws. Rather, they are held fully liable for any traffic accidents involving them if they were not crossing at a designated crosswalk. Thus, no more jaywalking. Sounds cruel, but I believe it might actually be rather effective.

What'll they come up with next?

2007-10-27T00:04:00.000+07:00

"Anti-Groping Appli". Props to the bloggers over at Freakonomics for finding this one.

An excerpt from it:

Experts say the incidence of harassment on trains is much higher, but women are often too embarrassed to report it.

And this is exactly why the incidence becomes high. When the probability of getting away with the act of groping is high, it will only encourage future acts. Because of the information that women are often too afraid or embarrassed to report the acts, the possibility of the woman making that report becomes viewed as an "incredible threat" to the perpetrator, and would leave them free to do as they please. Props to the makers of this application for creating something so simple and yet so effective at increasing the likelihood of women defending themselves against these kinds of acts, which should theoretically deter future acts because of a higher risk of being reported.

Now, if only we could figure out how to reprogram society to stop being so embarrassed to put a spotlight on sexual harrassment. But, I guess, if we could, we wouldn't need the Anti-Groping Appli in the first place.

Is there something wrong with the way we're learning?

2007-10-26T08:34:00.000+07:00

I got an A on my International Economics course, and I'm in the middle of my Advanced International Economics course (doing quite well, if I do say so myself), and yet I'm finding it difficult to answer these questions. By my count, I'm only confident in my ability to answer 4 of those 8 questions.

So, what's wrong here? It is me? Is it my lecturers? Is it our syllabus? It is the approach that Indonesians take to education in general (you'll be fine if you memorize the theory, with no additional merit for understanding the core concepts and being able to apply them in analysis)?

Or are these questions just really, really hard?

Death penalty follow-up: once isn't enough.

2007-10-25T20:04:00.000+07:00

I've just considered the implications of some of the comments made in my previous post on this topic, as well as a post from a lecturer's blog.

It seems that one of the reasons why punishments don't work to deter would-be criminals is because punishments usually serve as deterrence for future acts, only after the punishments are administered. Take, for example, the carrot and stick approach of rewards and punishments. The existence of the rewards and punishments do not affect behavior until after they are administered. Another example is stated in BT McCallum's paper on Central Bank Independency (yes, I know, rather far-fetched, but bare with me), where an analogy is used on how child delinquency can only be reduced not by threatening to punish them "next time", but by actually punishing the delinquent children.

Thus, perhaps huge, flashy punishments for serious crimes isn't the solution. Perhaps it would be better to inflict harsher punishments for lesser crimes, in order to lower the general levels of crime and enforce the social stigma that crime will not be tolerated.

The product of procrastination and desperation.

2007-10-25T07:07:00.000+07:00

I was in the middle of writing comments for recent posts from my lecturers, when I realized that my comments were long enough to write my own post. So, here it is.

Although it doesn't take a genius or an economist (very tempted to say that the two are analogous) to say that students cheat as a product of their procrastination and their resulting desperation, it might help in the analysis of why many cheaters don't cheat smart.

Part one: Why students cheat
Based on my observations, there are two main kinds of cheaters (feel free to disagree if you like, but I'm doing this partially to simplify the analysis). The first kind consists of students who procrastinate their studies too much, choosing instead to party and use their time for other things which give them utility in the present instead of some uncertain point in the future (I've done hyperbolic discounting to death in previous posts, please read them for reference). The second kind are students who believe that their options only consist of cheat or fail, because they do not believe that they can pass the class through their own efforts (mis perceptions that happen due to a combination of asymmetric information and risk aversion).

Either way, their conditions put them into situations where their choices each come with this kind of perceived probability structure:
1 a. Don't cheat, then pass. Gain utility = U. Perceived probability = 0%
b. Don't cheat, then fail. Gain utility = zero. Perceived probability = 100%
2 a. Cheat, don't get caught, then pass. Gain utility = U. Perceived probability = x, where 0 < x < 1.
b. Cheat, get caught, fail. Gain utility = zero. Perceived probability = (1-x)

As long as the perceived probability of not getting caught (x) is a non-zero number, the expected payoff for cheating is always higher than that of not cheating (because the expected payoff for not cheating is always zero).
Thus, the choice always falls to cheating, no matter how large the risk of getting caught, because they believe that as long as there lies a small chance of passing the class, they'd take the risk.

Part two: why they don't cheat smart
In the previous part, I pointed out what kind of people are likely to cheat. Now, I believe that the reason why cheaters usually don't cheat smart (cheating smart here being defined as maximizing the probability of getting away with it, or what we previously labelled as x) is because, simply, people who are smart enough to cheat smart usually don't fall into those two categories (yes, there are people who are good at cheating, but it's quite a minority compared to the two main groups).
People who are both diligent enough to work up a meticulous plan for cheating and willing enough to exert that much effort into it, surely cannot belong to the group of hyperbolically-discounting procrastinators. And, people who possess enough brainpower to be able to create a foolproof cheating method usually do not suffer from excessive pessimism, and would not think that he would even need to cheat to pass. There are, of course, exceptions to the rule, but they are called the exception because there are so few of them.

Part three: the important part
So, how do we discourage cheating? How do we make it so that even the desperate or the ones too lazy to do otherwise would finally stop submitting clearly-plagiarized papers or writing cheat-sheets too hide in their pockets and use during exams? We work with the expected payoffs. If we can make the expected payoff of cheating become lower than the payoff of not cheating, then we'd stop the would-be cheaters from making that choice. Thus, we should conduct policies that would bring a disutility to those who get caught (failing doesn't count because the student expects to fail anyway) and by maximizing the probability of catching them. Based on the stories in the two blogs I linked to above, catching the cheaters isn't the problem, so perhaps the issue is within the punishment. If lecturers were given the authority to, for example, expel students who are caught plagiarizing or cheating on tests, then it would bestow a huge disutility to the act of getting caught, thus making the expected payoff of cheating become negative (that is, coupled with the other policies to maximize the probability of catching the cheaters).

Would people still cheat? Definitely. Those who fall into the lesser categories (the smart and diligent who cheat just for kicks or due to the obsession of getting perfect grades) would not be put off by this because they believe they won't get caught. But, at least, the policy will be effective in combating the vast majority of would-be cheaters.

Speaking of which, what would happen to these would-be cheaters with a zero expected payoff for not cheating and a negative expected payoff for cheating? Well, hopefully they'll learn that there's a third option: lots of studying and lots and lots of prayer.

Why doesn't the death penalty work?

2007-10-14T18:29:00.000+07:00

Did you know that there's a World Day Against the Death Penalty? It was a few days ago, apparently.

The reason why the death penalty is still being used as a legal form of punishment in some parts of the world nowadays is because the people up there (policy makers, not God, just to clear up any confusion) believe that the threat of a death penalty will act as a deterrent for crime.

The statistics, however, are inconclusive. As a letter from a reader in this week’s The Economist (13-19th October 2007 edition) points out, murder rates in US cities and states are seemingly uncorrelated with whether the states use the death penalty. High murder rates occur in some states that use the death penalty, while low murder rates also show up occasionally in states that have abolished it.

So, why are some policy makers so adamant that their deterrent works? More importantly, why doesn’t it?

The death penalty is supposed to act as a deterrent to crime because it adds a much larger risk to the act of committing crime. Other forms of punishment i.e. prison, were concluded to be too small of a disincentive because people were still committing crimes such as murder and drug dealing. Thus, policy makers sought to create a larger disincentive to deter would-be criminals from committing these crimes, and what better disincentive than the threat of death? Thus, the death penalty was implemented.

However, since it doesn’t work as predicted, it begs the question: why not? Is it because the disincentive is still too small compared to the utility from doing the crime? Is it because the would-be criminals simply do not value their lives?

To find the answer, let’s work through the payoff structure of a would-be criminal. We’ll analyze both cases (with death penalty and without) as one. In both cases, the would-be criminal faces two possibilities. First is committing the crime and not getting caught, which would give them the utility gained by their act (satisfaction from murdering their cheating wife, the life insurance claim they get from their husband’s “unfortunate demise”). Second is committing the crime and getting caught, in which case the utility is no longer gained, and is replaced by the disutility of whatever punishment they get. Let’s say that in both cases the disutility of the punishment is larger than the utility of the crime. However, since the disutility happens in the future and the utility happens now, a discount rate must also be applied. Thus, there are two main variables which determine whether or not the would-be criminal ends up committing the crime: the probability of the two occurrences, and the discount rate of the disutility.

This brings me to my theory. First, the absence of perfect information results in the would-be criminals to miscalculate their probability for success. Every criminal thinks that they’ve planned “the perfect crime” with zero possibility of getting caught. Thus, the perceived probability is much higher than the actual figure (although, granted, the actual figure isn't that low), and thus most people end up doing the crime, regardless of what punishment awaits, because they simply believe that they will not get caught. Also, hyperbolic discounting probably applies especially to these people, because they only give value to the now, with no regard for the future (kill my wife, no matter what the consequences). Thus, again, whatever the punishment, they’ll still end up doing the crime. Of course, there’s also the issue of the cluttered bureaucratic process which causes many people sitting on death row to never actually receive the death penalty, but for now let’s just assume a world with an ideal and efficient bureaucratic process. Hey, we can all have our dreams, right?

Thus, to conclude (and this post is way too long as it is), it’s not a matter of what punishments await these criminals once they’re caught that can deter them from committing the crime. In fact, in many cases, there’s really no stopping them once they get the idea in their heads. So, why implement a punishment so heavily debated due to issues with human rights (i.e. does the state have the right to take away the life of its citizens?), if it doesn’t make much of a difference anyway?

The THR Phenomenon

2007-10-09T09:36:00.000+07:00

To continue the analysis on Eisha's post below, I've noticed something strange on how this country handles "tunjangan hari raya" (what's the English term for this?), more popularly known as THR.

So, apparently our government makes THR compulsory for all employers now. The reasoning? It's necessary to help the people cope with the inflation associated with the holy month of Ramadhan and the following Ied holiday (see post below for details), it's vital to induce higher levels of productivity, and it's their right.

But, is it really the best way to go?

Rising prices associated with the holy month of Ramadhan are caused by impulse buying, consumption smoothing, oversensitivity to the loss of utility from fasting, and especially just the overall "flaw" in societal paradigms. In short, society has brought it upon themselves. It doesn't help that the producers and distributors are exploiting this through massive, store-wide discounts, either.

After reading a bit of Kydland and Prescott for my Central Banking midterm (which I really should be studying for at the moment since it starts in about 3 hours), I really do understand now what they're trying to say.
If governments conduct discretionary policies, which means to base their actions and policies on society's behavior instead of on a basic set of rules (reflecting, of course, their goals for the betterment of the nation), then it would lead to society exploiting these discretionary policies due to their rational expectations. So, what if society overconsumes during Ramadhan, causing a huge hike in inflation, because it knows that the government will bail them out, and that THR is coming? Doesn't that mean that the government's act of "helping people cope with rising prices" is actually one of the reasons why these prices rise?

Furthermore, according to labor economic theory(also another one of my midterms coming soon), non-wage increases in income actually creates a substitution effect that lowers work hours. So much for productivity, no? Oh, and I'm guessing(just guessing because I have no data), it doesn't do much for employment, either, since an 8% increase in wages (the equivalent of paying an extra one month's wages for every employee)won't really help labor demand much.

Anyway, I, for one, don't mind getting extra money for the holidays, because it allows me to consume more than I normally would, and I get to buy more expensive food and those nice clothes that would raise my level of utility and welfare, at least for a few weeks or so. But seriously though, if it has no long-term beneficial impacts, why are we doing this, anyway?

Inflasi dan Makna Essensial Ramadhan: Sebuah Analisa

2007-10-06T22:06:00.000+07:00

Berdasarkan laporan Badan Pusat Statistik (BPS), inflasi bulanan September mencapai 0.8%, yang merupakan angka inflasi bulanan tertinggi sepanjang tahun 2007. Penyebabnya adalah kenaikan harga bahan pokok yang menjadi langganan menjelang lebaran dari tahun ke tahun. Mulai dari beras, minyak goreng, cabai merah daging sapi, pisang, ikan segar bahkan harga emas sekalipun ikut naik. Fenomena kenaikan harga menjelang lebaran ini dapat dijelaskan melalui analisa sederhana permintaan dan penawaran serta pola kebiasaan dan konsumsi masyarakat Indonesia menjalani bulan puasa dan menyambut Hari Raya.

Seperti kita ketahui bahwa sebagian masyarakat Indonesia memeluk agama islam, dimana bulan Ramadhan adalah moment spesial dan dinanti. Selayaknya kedatangan tamu istimewa, tuan rumah pun menyambutnya dengan jamuan dan hidangan khusus. Dalam kitab suci dikatakan bahwa Ramadhan hendaknya disambut dengan gembira, mengingat bulan penuh berkah. Di sini, saya menganalogikan Ramadhan sebagai tamu istimewa. Tidak ada yang salah dengan jamuan khusus untuk tamu istimewa, bahkan sangat dianjurkan. Namun, jika jamuan-jamuan yang dihidangkan terlalu berlebihan, atau misal, sang tamu berupaya menyediakan jamuan istimewa yang sebenarnya ia tidak sanggupi, sesuatu yang tidak ada diupayakan menjadi ada. Penjelasan dengan menggunakan analogi hanya untuk mempermudah bahasan ini, jika kita melihat fenomena penyambutan Ramadhan, saya teringat dengan cerita yang disampaikan Faisal Basri dalam kuliah Perekonomian Indonesia, dari cerita itu pula inspirasi datang. Intinya, masyarakat indonesia telah salah menilai arti dan makna dari puasa. Coba kita lihat saja, hidangan berbuka puasa yang berbeda dengan hidangan makanan sehari-hari, sebutlah kolak, biji salak, es buah. Bagi sebagian orang pun, porsi makan besar mereka jatuhnya akan lebih besar jika dibanding ketika hari biasa dimana mereka tidak berpuasa, istilahnya, balas dendam. Setelah seharian berpuasa, ketika berbuka saya ingin minuman segar, makan enak, dan bukan makanan biasa, atau porsi makan saya harus lebih besar. Bukankah puasa itu menahan hawa nafsu? Atau contoh yang lebih ekstrem lagi, penyelenggaraan berbuka puasa bersama yang lazim dilakukan, baik oleh kalangan atas, seperti pejabat, orang-orang penting hingga anak remaja yang menjadikan ajang kumpul dengan teman-teman. Walaupun terdapat point menjalin silahturahmi disana, buka puasa bersama yang mereka lakukan lebih terkesan sangat konsumtif.

Pola konsumsi yang meningkat ketika menjelang Lebaran inilah yang menjelaskan mengapa ketika bulan puasa dan lebaran tiba terjadi inflasi bulanan tertinggi sepanjang tahun. Kita dapat menggunakan analisa sederhana, yaitu permintaan dan penawaran aggregate, dimana permintaan akan barang-barang pokok seperti minyak goreng, beras, cabai merah dan lainnya meningkat, sehingga menggerakkan kurva permintaan agregat meningkat. Jika tidak diimbangi dengan kenaikan aggregat supply, maka akan mengakibatkan price level yang meningkat, dan inflasi pun tak terelakkan. Jika saja makna essensial dari bulan Ramadhan dipahami betul oleh masyarakat indonesia, inflasi musiman-inflasi tinggi yang terjadi ketika bulan ramadhan- tidak akan terjadi.

Industrialization: possible?

2007-09-24T22:17:00.000+07:00

Imagine that you work in construction, and have been asked to take over a house-building project because the previous supervisor retired. Your first day on the job, you realize the mess your predecessor left you. The foundation is shaky and poorly-constructed, and the house doesn't even fit the specifications that the customer wanted.
What do you do? Knowing that it would take way too long to demolish the monstrosity and start over from scratch, do you:
Ask for a time extension, realizing that it would involve facing angry and disappointed customers?
Just continue the job, hoping that they won't realize what's wrong with the house until you're far, far away (pretty much what your predecessor did)?
Or, well, what other alternative is there?

Change the words construction and house to president and country, and we'd have a pretty accurate description of Indonesia's industrialization. After thirty years of mistargeting in policy making, such as import substitution policies for economically unsound industries, as well as excessive and unplanned protectionist policies for said industries, Indonesia's industrialization is officially a trainwreck, and there's not much that can be done for the short run. To put Indonesia's industrialization back on the right track, it would require years of intense research and development to find economically sound industries with the kind of potential that can be ridden all the way to a higher state of development, as well as a meticulously-crafted plan for each step of the industrialization process. However, that requires time and money that no one really wants to spend. The people currently in power only have to care about their next few years, whereas development is something that needs to be planned out carefully over longer periods of time.

It really does make you feel sorry for the current administration, doesn't it? Being blamed over something that isn't really their fault, just because they have the common sense to know that there is no instant solution and thus elect to patch up the shoddy craftsmanship instead of starting over.
Meanwhile, one question left to be asked: Is there anything that can be done about Indonesia's industrialization? Or are we -and I can't seem to find a word that fits better than this- screwed?

The economics of peer pressure.

2007-09-24T02:56:00.001+07:00

While searching for inspiration for a certain Microeconomics 2 assignment, I started to ponder about the various things that neoclassical economic theory can't explain. Trying to find something unique and interesting, my mind suddenly stumbled upon it without warning: peer pressure! Unfortunately, the issue my lecturer wanted had to be in the form of a recent newspaper/magazine article, so it's back to the drawing board in terms of the assignment. However, I found the topic too good to pass up.

How can we analyze peer pressure from an economical standpoint? Peer pressure involves the use of intimidation and threats of social exile to "persuade" someone to do something that they otherwise would not do. For example, a thirteen year old (we'll refer to him as the victim, just because it seems appropriate) who is forced by his group of "friends" to try his first cigarette or his first gulp of beer. They taunt, jeer, and mock him, as well as threaten the severance of any and all friendships, should the victim fail to complete the task. In the end, the victim succumbs to the pressure, and takes a nice, long drag on the cigarette, starting on that long road called addiction, leading him straight to a future of lung cancer, impotence, and emphysema.

From a neoclassical standpoint, this makes absolutely no sense.
Firstly, if an individual views something as a good that does not give them utility, then it won't be consumed. If an individual views that object as a provider of negative utility (in other words, an economic "bad"), then the individual will be even more averse towards the object, and will not even consider going near the thing unless an equal amount of positive utility is given to him as compensation.
Thus, if the boy views the cigarette as an economic bad, then it doesn't make sense for him to consume it, especially when no form of compensation is given.
Secondly, since the boy's group of "friends" are obviously a bad influence on him, thus actually giving him negative utility and making him worse off, they should also be treated as an economic bad would be treated, i.e. dumped as soon as possible and as far away as possible. However, in the case of peer pressure, the boy ends up trying the cigarette because he did not want to lose the companionship of his "friends". Thus, the friendship and companionship of these juvenile delinquents is actually viewed as a positive, instead of a negative like what theory would suggest.

Is the mere notion of companionship and solidarity, regardless of the source, that much more important in a teenager's utility function than the health of his lungs? Is friendship really so important to teenagers, to the extent that they no longer consider the negative impacts and influences brought on by the friendships? I guess, in this case, the answer is yes.

I'd pity them, but this is exactly how I tried my first cigarette.

Climate change: inevitable?

2007-09-23T02:05:00.000+07:00

Is there anything that Indonesia can do to circumvent, or at least mitigate, climate change?
As a recently-converted environmentalist, I'm feeling rather pessimistic.

Carbon trading? Out of the question. Indonesia's law enforcement and bureaucrats are too busy looking the other way while businessmen and irresponsible locals take axes and chainsaws to the precious few carbon sinks we have left.

Fossil fuel taxation? We've had more than enough angry mobs just from cutting a subsidy. God only knows what will happen after a fuel tax.

Alternative sources of energy to replace fossil fuels? Biofuels entail rising food prices, especially for biofuel crops, not to mention the tree-chopping required to expand the corn fields and palm plantations. Even the United States has pretty much given up on ocean wave, wind, geothermal, and solar power. Nuclear energy, well, take the angry mobs from the fuel subsidy cut, multiply their ranks by an arbitrarily large number, and, well, you get the point.

Emission taxes? In a country where only a small percentage of its citizens pay any sort of tax other than VAT in restaurants, and where the capital city can't even manage routine emission checks on its public transportation system, I am left, once again, rather pessimistic.

Clean development mechanisms and green technology? In a country whose largest exposure to technology is in the form of its booming cellular phone market, widespread and effective implementation of green technology in our industries seems ages away.

So, bad news: We're currently the fourth largest contributor to greenhouse gas emissions, the villain behind climate change, and judging by the way the top three are starting to handle their emission problems, we might soon become the first largest.

Good news: At least we'll be the first in something.

Questioning Rationality

2007-09-23T01:29:00.001+07:00

What is "rational", really?

Is it rational for someone to choose a job with a lower salary because the high-paying job involves travelling abroad, which he's actually exhilarated about but his wife doesn't quite want to do? After all, settling for the low-paying job involves the huge opportunity cost of that forfeited salary, which could have been used to pay his son's way through college with much more ease than the salary he ends up taking. Furthermore, his wife doesn't have to follow him abroad, and he can just use some of the extra money accumulated to buy plane tickets every now and then to visit his family back home.
Would it be rational for someone with a college degree to end up a monk, living the rest of his life in a monastery, celibate, impoverished and never making a single cent off his job, instead of living a more "normal" life, involving civilization, women, and money? After all, not getting a job after going through college means that the sunk cost of tuition, books, and all other expenses that college entails ends up being wasted, the opportunity cost of (yet again) forfeited wages, not to mention the opportunity cost of the time spent actually going to college.
Now, let's think simpler. This one's an example from my lecturer: Is it rational for someone to give someone else a birthday present? Because, it's obviously true that the one with the most complete information on a person's set of preferences is that person himself, and thus it would be more utility-maximizing, certain, and "rational" to just give the person cash in the amount you would have spent on that gift, so that he can pick out his own gift.

Thus, all three cases are examples of irrational behavior. Right?

Not quite.

The main flaw of neoclassical economic theory is the failure to account for non-material factors in a utility function. Utility, according to the theory, is a function of income and price levels (and thus, goods consumed). However, that kind of utility function, at least in my opinion, pretty much only applies to Ebonezer Scrooge (before the three ghosts, mind you, not afterwards).

After all, what is utility, really? Utility is a measure of satisfaction that we gain from things. True, many, or should I say most, people gain utility from price levels and income levels. Let's face it, we all need to eat, dress nicely, and buy little electronic gadgets to keep ourselves happy from time to time.
However, those aren't the only things we gain satisfaction from. Some people gain utility from witnessing other people gain utility. For example, how a father craves a smile on his son's face, and would do anything to get it, even if it involves spending his beer and cigarette money (for his own utility) to buy his son a model train kit (for his son's utility). Some people gain utility from feeling close to God, which is why some people end up as monks, preachers, and nuns, instead of joining the rest of the world in the hunt for that seven-figure salary (yes, I'm talking about dollars, because seven-figure rupiah salaries aren't very large).

So, I guess we're all more rational than we give ourselves credit for.

P.S. Yes, I know that this is information that everyone probably already knows, but the point wasn't to spread insight. The point was to criticize neoclassical economic theory. And yes, I'm very much aware that it's already been done, but this is just my take. So there.
P.P.S. Forgive me for all the masculine pronouns, it's just for the sake of ease of writing. It keeps everything in singular form (instead of writing "they" as a unisex singular pronoun), and his/her is just too much of a hassle. No sexism intended. Really.
P.P.P.S. After doing a bit of browsing, I found a nice read on behavioral economics here.