Pxkit

My mom is very efficient. Maybe too efficient, she wrote pxkit in one of her recent short messages to me. It took me awhile before I understood that what she meant was ‘penyakit’ (illness). Yes, she has been using x as a short-hand for 'nya', the suffix; and I figured that out. But x in the middle of a word? That was kind of new to me.

This morning, Simon Gower complains in The Jakarta Post about too many short-hands used in text language. He listed, among all, 2b for ‘to be’, gr8 for ‘great’, 4c for ‘foresee’, and even the already very obvious ones like cu for ‘see you’, ur for ‘your’, or (again, even!) wanna for ‘want to’. He calls all this ‘oddities’. And he asks, “Can we stop this SMS mess?”

My answer would be “No, we shouldn’t even try”. I think short-hands in hand phone textings are fun and clever. Gower indeed admits that "these oddities have their place", but he quickly adds, "that place is surely on the small screen of mobile phone where space (and texting fees) is of concern". O’coz, datz d whol idea, mr!

Gower goes even further as saying that the ‘oddities’ can create an "unnecessary intrusion for people who are learning the English language". Why on earth should we bother with those who are studying English? It ain’t me mom’s buz.

Gower is right that ideas (delivered in the way of his accused oddities) "run the risk of getting lost if the reader is not familiar with the short-hand or just cannot be bothered to spend time to figure it out". Two things here. If I were to text you, I would have to make sure (or at least assume on my own risk) that you would understand what I would be saying, with or without short-hands. On the other hand, if I accept a weird sms with oddities, I would simply trash it right away, unless I am interested, for which case I would simply reply with ‘?’ – This has been working well so far.

So, Mr. Gower, relax. I hope d govt ppl r all out 4 holidays, so no time 2 read ur complaint coz odrws, theyll start thinkin’ o some way 2 regulate sms texting... LOL & :-)

Language

Manager's Top Movies

I remember, when we started up the Café somebody (don't remember who exactly) suggested not to have any posting on lists -- you know, that thing people like to have in their blogs: list of favorite movies, books, etc. But I'm gonna break it, cause it seems fun. Here's my "top" movies list, in alphabetical order (I have set up my own stupid rule: at most one movie per letter allowed).

Annie Hall (1977), Being John Malkovich (1999), Clockwork Orange - A (1971), Dreamers - The (2003), Erin Brockovich (2000), Farewell My Concubine (1993), Groundhog Day (1993), Happy Together (1997), Jaws (1975), Kikujiro (2000), Life is Beautiful (1997), Maléna (2000), North by Northwest (1959), Philadelphia (1993), Rosencrantzs & Guildenstern are Dead (1990), Strictly Ballroom (1992), To Catch A Thief (1955), Usual Suspects - The (1995), Vertigo (1958), What's Eating Gilbert Grape (1993), Y Tu Mama Tambien (2001).

Movies

Econ 101: Demand Part 2

Last time we talked about measuring preference using utility concept and then maximizing the utility subject to choice- and budget constraints. Let’s continue. (For those who just joined, The Manager has kindly put the series in order of appearances on the sidebar).

The utility that is a function of the things we consume (apple, orange and all that) is called direct utility function (DUF). That is, you infer my utility function by looking at how many apples I decide to eat. Many times, you can just infer one’s utility function by knowing how he usually responds to a given income level and the existing prices of goods considered. This is called indirect utility function (IUF). These two concepts are very closely linked. Your satisfaction from apple depends on how many apples you consume. But how many apples you consume depends on how much money you have and how much one apple costs. So, representing utility using information on prices and income level is identical to representing utility using consumption level. This is the first magic.

Both DUF and IUF are maximizing functions: you maximize your utility given your income. That is, you are answering the question of “what is the maximal level of utility you can get with your given income”. What if the question instead is “what is the minimal level of income needed to reach a given utility level”? Then you do it the other way around: you minimize your expenditure given the utility level you want to achieve. The first approach is called utility maximization problem (UMP), and the second is expenditure minimization problem (EMP). Now here is the second magic: if you want to know the optimal level of one’s consumption, you can go either way: UMP or EMP. We say, one is the dual to the other.

Note again that in UMP we try to find the optimal level of consumption by varying utility to match a given income level. The resulting demand function is called Walrasian demand function.¹ In the EMP approach, we try to find the optimal level of consumption by varying income level to match a given utility level. The resulting demand function is called Hicksian demand function.² This latter function is also called compensated demand function because in fact we imagine the individual as if we keep adjusting (‘compensating’) his income so as to let him be in the same level of satisfaction. (So you know why the former is also called uncompensated demand function).

Now we are ready for the most celebrated Law of Demand: “If the price of a good goes up, the demand for it goes down...” – many textbooks stop here; nevertheless, it should really continue with “... if the price changes are accompanied by income compensation”. This is the property of Hicksian demand. On the other hand, it is possible that when a good’s price falls, the demand for it ... decrases. This can happen with Walrasian demand, an example of which is a Giffen good.

Stay tuned for the welfare analysis of consumer demand.

---

¹ After Leon Walras, 1874. Many textbooks inaccurately call this Marshallian demand function (after Alfred Marshall, 1920).

² After John R. Hicks, 1939.

Econ 101

Polygamy, again

I agree with Aco. That is, I don't disagree with the practice of polygamy.

What concerns me more is the fact that the President (and that means, representing the State) needs to have a say on this. It is amazing that SBY can't say a word on a lot of things he is supposed to be decisive, yet he quickly reacts to private matters like this. In today's paper (linked later) it is reported, SBY wants people not to make a big deal out of this polygamy thingy. Well, you, a president, should not make a big deal out of it.

Polygamy is not and never supposed to be the State's business. Managing taxpayers money well is.

Polygamy

SmackDown

I'm sorry for that kid who died after an injury from a smackdown match with his friends. Also for other injured kids everywhere, regardless of what they just saw on tv: wrestling, cartoon, or crappy 'sinetron'.

But banning SmackDown? Give me a break.

When your kid gets injured trying to practice what he saw on tv, it's not your tv's fault (or the producer's, or the station's, for that matter). It's yours. When your kid gets kicked by another kid who happens to get the idea from tv, it's not the tv's fault, it's that kid's parents'. So, go sue them irresponsible parents.

If you want compensation from a tv station for a damage you think caused by it, the tv station should also demand compensation from you if your kid learns good stuff from its other programs or shows. If you say, no, you have paid your due every month, I'd say OK, the damage has also been deduced from that payment. Fair, no?

Well, now you're calling me a Lativi protector? Get this: I don't give a damn to that company. I don't even like SmackDown. It's totally stupid. A display of a bunch of airheads bumping into each other with silly chicks walking around. Here's what I would do: turn off the tv. Watch House MD, CSI, Lost, or Grey's Anatomy -- while my kid (if I had one) is sleeping...

Wait, I got an idea. While people are banning SmackDown (and Lativi), I'm gonna play it here in the Café. Big screen. Who says I don't have business sense?

SmackDown

From the Manager

Boy, I hate that Econ-101 series. Never known economics is even more boring than inflation, growth, and interest rates. Damn it.

Well, I'm glad the world is not just that. At least these bitches are back. And oh, this guy is entertaining (he's totally right: Ahmad Dhani is a genius!).

JakJazz wasn't so bad. (But what was Shakatak doing there?).

I'm playing Ray Charles. Hit the road, Jack!

Econ 101: Demand Part 1

Recall our assumption of rationality? Yes, by rationality we mean people’s preference relations are complete and transitive. In order to talk about demand, we now need two more (sorry, guys) assumptions, namely desirability and convexity.

Desirability simply means you prefer more to less. It is represented by the property of monotonicity that means if I ask you to choose between 3.1 apples and 3 apples given the same constraints, you opt for the former. Wait a minute, you say. What if it is not an apple, but something bad, like trash? Well, simply modify the offer statement: 3.1-unit reduction of trash and 3-unit reduction of trash.¹

Convexity (of preference relation) means your willingness to give up a unit of a particular good in order to get another unit of different good in exchange given your constraints is increasing the more you have the former and the less the latter. (Note: our definition of convexity in the consumption and budget set still hold). This is called diminishing marginal rate of substitution.

So far we have been talking about preference. How do we really analyze it? We usually use a tool called utility function. This is simply a means to express how you would respond when facing a set of goods given the prices and your income. In order for us to represent preference relation with a utility function, we need (oh, shoot!) to assume continuity. It says, if you prefer 1 apple to 1 orange, 2 apples to 2 oranges, you can’t suddenly, out of blue, prefer 3 apples to 3 oranges.²

How do we put the utility function into use, then? By solving a maximization problem. That is, we suppose an individual is trying to maximize his satisfaction (i.e. utility) given his choice set and budget set. By maximizing we mean, he will use up all his income to consume the goods of interest (saving can be a form of a good; I see your eyebrows rising). We would continue on this.

Stay tuned.

---

¹ But hold on, you say. You’re craving for ice cream. I give you one cone, you ask two. I give you two and offer a third. You start to look less eager, but you still take it. I offer a fourth; you give me a no-thanks-I’m-fine. This is called diminishing marginal utility. It is not contradictory to the monotonicity assumption of the preference relation. You can still prefer more to less, but the additional satisfaction the ‘more’ gives you is becoming less and less as the quantity grows. Four cones of ice cream are too much already for you; you prefer three. Remember that we have constraints that limit preference? Yes, one of the physical constraints is quantity that might be bound to taste (or well, your stomach capacity). In this case we can say that your set of ice cream is limited to three. But don’t take this anecdote very seriously; rather, we usually go around such problem with a weaker restriction called local non-satiation – you’re never satisfied, 'locally'. Meaning, you can still prefer 2.999999999999999-unit of apples to 3 apples and at the same time, prefer 3.000000000000001-unit of apples to 3 apples. But let’s not dwell into this technical necessity. We’re safe for now.

² Again, do not take the numbers too seriously. It is the order that matters.

Econ 101

When excess supply is a win-win

This is hillarious. According to The Jakarta Post here,

Minimum wage rise [is] a compromise of supply, demand

Let's see:

1. Policy is supposed to be effective, agree? (Otherwise, what's the point of making a policy?)
2. Now, for a minimum wage policy. What is 'effective'? Effective minimum wage is when wage can not go lower than that, agree?
3. What is 'compromise' between supply and demand? It is a situation where supply meets the demand (or demand meets the supply, whatever), no? Economists call it 'equilibrium'.
4. Now, if supply and demand meet, is there any excess? No. Because if there is, it is not an equilibrium. Not a 'compromise'.
5. So, in order to be effective, a minimum wage should be higher than equilibrium wage. That means, it should be such that an excess supply is in effect.
6. In other words, the title of the news is at best, misleading.
   

More coffee, please?

Econ Fallacy

RIP: Milton Friedman

May Milton find markets less distorted up there.

Here's from The NYTimes. Here's from the newly launched The Economist's blog.

Econ101: Consumer Choice

Remember our own definition of economics? Yes, choice. Let’s now talk about what an individual actually does when we say "he chooses”. We’re going to talk about a typical consumer. Consumer is the most fundamental decision unit. (Or put it this way: every producer is also a consumer, but not the other way around).¹ Understanding what a consumer does helps us understand what the other units do.

What is it that consumer choose over? Anything you can want: food, books, coffee, music, boyfriends, identity, clean air, sex, religion, justice, blog templates, et cetera. We call them commodities.² Can we have them all? As much as we want? No, because there are constraints. The explanation to Mick Jagger’s “you can’t always get what you want” is because we face restriction(s). And that’s why we have to make a choice.

The first limitation is the physical constraint. This includes time, quantity, place, taste, and institution. We can’t choose a durian simply because it is not a durian season: no one is selling it. We can’t have leisure 25 hours in one day, because one day is only 24 hours, unfortunately. We can’t buy half a car, because the smallest quantity sold is one. We can’t eat u-dong in Seoul and Jakarta at the same time -- and at either place, we're bound to our taste. We can’t drive and drink because the law doesn’t allow us. Given all these restrictions, whatever left you can choose from is called the consumption set.

The second limitation is the budget constraint. This is a matter of affordability that in turns depends on the level of your wealth – usually represented by income. For now we will have to employ two assumptions. First, all the commodities have a price and everybody knows it. Second, no one can affect the price, or more accurately: your individual act of buying doesn’t really affect what is going on in the market.³ Given the prices and your income, your feasible consumption bundles are now captured by what we call your budget set.

Another important assumption is that both the constraints are “convex”. This means, when your consumption set includes bundle A and bundle B, then it should also include any combination of the two bundles (e.g half of bundle A and half of bundle B, rather than A only or B only). Similarly, if both bundles are included in the budget set, so is any combination of them.

When finally you decide to make a choice given the consumption set and the budget set, we say you’re revealing your demand function. That’s the topic of our next talk.

Stay tuned.

---

¹ This principle is very powerful to attack all the pathetic protection asked by producers. And to debunk all the harsh attack on consumerism. How so?

² Try telling a girl that she is a commodity. If she is flattered ("Oh that so sweet, you’re telling me I’m valuable!"), she might have learned this stuff.

³ This is sometimes called ‘price-taking’ behavior. It doesn’t mean you can’t bargain at all. You can bargain, but whatever the price you and the seller agree doesn’t translate into the same change in the market.

Econ 101

Childrenomics part 3 - household decision making

Another aspect that determines the outcome of children's health, education and other things is who makes the decision in the household (who decides what, and what's the relative 'voice' of each decision maker). Let's now narrow the decision makers to mother and father. We'll deal with another person (i.e. in-laws) later. Two extreme cases: 1) unitary model of household decision making, and 2) collective model.

In the first case, household acts as if there is only one decision maker. So, consumption/spending decisions are only affected by total household income. In the second case, imagine that the two parties (mom and dad) are 'bargaining' over what/how much to spend. The question is what determines each party's bargaining power?

The traditional approach on this is to assume that the bargaining power is determined by how much each party earns money. We can think of the other variants, such as relative 'assets ' (financial, social) brought when both got married, etc. We can think of an extreme situation in which only one party earns money, so he or she has all the voice over household decision. In this case, we are back to the first case.

Of course this is not the perfect approach. After all, we see a lot of cases where the wife does not earn antything but she takes full controls over everything. Welcome to the 'Dictated Husband Association' (Ikatan Suami Takut Istri, ISTI), guys!

Many studies found that when mother has greater say in household spending, it leads to better outcome of children's health. An example is a study by Duncan Thomas (1994), using log calorie intake, log protein intake, survival rate, weight for height and height for age. I can not recall which studies, but I also remembered similar results for mortality rate and low birth weight.

What about the decision made by other parties in the household? For now, I don't have any studies to quote. But we are having a real world experience with the issue...

Childrenomics part 2 - gender preference

Some societies have preference over boys. Perhaps because boys will carry the family's name, but also because they can rely on their boys to do heavy works. Other societies prefer to have girls; because in their cultures girls are responsible to take care of their parents in the old days. Or, parents may not have any preference over a certain gender, but they want to have both genders in the family. Each preference will have implications in the size and resource allocation of the family.

One implication of gender preference is gender discrimination - in terms of within-household resource allocation. Deaton (1989) measured the boy-girl discrimination in terms of the 'reduction of household expenditure on adult goods.' (Adult goods: tobacco, adult clothing, alcohol, eating out, etc.). When a kid is valued more, parents will be more willing to reduce their spending on adult goods. He found no evidence of gender discrimination in Cote d'Ivoire, and a small and insignificant bias in favor of boys in Thailand.

We can also measure boy-girl discrimination in terms of health outcome. Using data from rural Punjab, India, Monica Das Gupta (1987) found that the mortality rate of children below one month is higher for boys. However, as the children gets older, girls mortality rate surpasses boys. Child mortality rate is also much higher for girls who were born as the second child and over.

The fact that boys have higher probability to die within a month after birth is quite logical. Boys have the XY chromosome, while girls have XX. Remember that the Y chromosome is a 'mutated' version of the X - means that boys are by nature mutants (the 'defect' version of girls). That makes boys are more prone to death, which explains the higher rate of postnatal mortality rate. The higher rate of girl mortality rate at the older age reflects the different treatment of parents. For example, girls receive lower nutrition, less clothing etc. And the value of girls is even less when parents have already had more survived children.

My professor at Harvard, Robert Jensen (2006) raised another issue. Parents may not necessarily discriminate against girls (or boys). But they may still prefer a certain gender (let's say, boy). When the first child is a girl, parents is more likely to have another one. When the second one is still a girl, it is more likely for them to have a third one, and so forth. As the result, girls tend to come from big families. Even though parents don't discriminate, coming from big families, girls will have smaller allocation of household resources ("equal treatment, unequal outcome").

How true is that? The answer can't be theoretical - it should be empirical. That may also depend on where do we do the research. But according to his preliminary finding, some Indian states where preference over boys are strong tend to confirm this results.

Childrenomics | Gender

Childrenomics part 1 - fertility decision

Introduction: Having a baby makes me more exposed to children-related economic research. Or, perhaps it is the reverse: having been exposed to children-related research makes me (want to be) having a baby. Nevermind. Here are some literature review of some research in the topic.

Why do people decide to have kids? Is it driven by preference or constraint? Earlier, I raised the debate between the 'family-planning' vs. 'desired demand' hypothesis of fertility. The former argued that people have (many) children because of constrained access to contraceptive. The latter argued that people have many children because they do want to have many children.

I'm leaning towards the 'desired demand' hypothesis. Having children is a rational choice (although for some people, it may be an 'accident' - no judgement on that). Rational means parents calculate the benefits of having kids compared to its costs. The benefts and costs do not have to be perfectly known, nor they should always be measured in financial terms. The bottom line is, economic theory also allows us to predict human behavior in terms of fertility decision.

What's behind the demand (desire) to have kids? In Indonesia, we know the term 'more children, more prosper' ('banyak anak banyak rejeki'). Behind the old saying, there are economic rationales.

First, old-age security. Parents expect their children to take care of them when they are old. Missing market, in this case the market of pension fund and senior citizen care gives the reason for this view.

Second, family (cheap) labor, usually for rural agriculture households. Again, this happens because of the missing or imperfect market for labor, as well as market for goods; so households will have to rely on own production.

Hence, missing markets help explain why people have many children.

In addition to that, parents may decide to have many kids to increase the number of survived kids. This may happen when the health situation and infrastructure is poor. By having many kids, parents can achive their 'targeted' number of kids. Lastly, number of children may also be affected by gender preference. The probability of having a second, third and next child is greater if parents has a preference over a certain gender (more on this).

Childrenomics | Fertility

From the Manager

Happy (belated) birthday to ... us :-)
.... It's really been a year?

New member

We'd like to proudly announce the newest addition to the Café Salemba family: Cemara Perdana.

P.S. Regardless of your opinion about population control, please note that my wife and I did not contribute to the population growth. In fact, we were adjusting the supply and demand for children disequilibrium.

Econ101: Preference

Hi again. It’s time now for the third installment of our Econ101 series. After introducing some key concepts needed to speak the 'baby' language of economics, let’s now turn to a more structured and systematic approach. That is, we’re going to follow a text book structure, without having to religiously adopt its verbal and mathematical presentation.¹ Yes, we’re going to do it the Cafe-way (and that may as well mean irregular schedule!). Lean back and enjoy your coffee.

When we analyze an individual behavior (in making decision, or more accurately in choosing between available options, given his constraints), we need to make some assumptions with regards to his preference. The most important assumption is that the guy is rational.

What do we mean by rational in this context? We mean his preference relation is complete and transitive. Complete means you can describe the relation between any two goods that he is considering. So, if the guy is considering apple, orange, and banana, you have to be able to say whether he prefers apple to orange. Also, you have to be able to tell his preference over apple and banana, as well as banana and orange. The good thing is, telling that he likes banana as much as apple is a valid statement – we say he is indifferent between banana and apple.²

Transitive means consistent in choice ordering. If our guy prefers apple to orange and orange to banana, he should prefer apple to banana. Yes, this assumption is strong: I know a friend who likes Manchester United more than Liverpool and prefers Liverpool to AC Milan, but he loves AC Milan more than MU. That’s fine, but for now, let’s assume away such intransitivity. Don’t worry; we will relax the transitivity assumption sometime later. (That soccer freak friend of mine; he ain't crazy, he's just irrational, as we 'have to' call him).

How do we conveniently talk about preference? By assigning numbers to the preference order. In our example, the preference order of the guy is: apple-orange-banana (in decreasing order of importance). Now let’s assign some numbers. Yes, we’re assuming that we somehow can measure satisfaction. Suppose the satisfaction experienced by the guy if he consumes an apple is 10. Then, the corresponding number of an orange should be less than 10. Say 7. How about a banana? Yes, it should be less than 7. Say 5. We say, for the guy, the utility of apple, orange, and banana are 10, 7, and 5, respectively. Can we change the numbers? Yes, we can. But mind the order! So, if you like you can use 1,000-700-5, or 356,464-100-0.3. But combination like 3-5-1 or 7-4-10 is not allowed, given the guy’s preference. You see, utility function is an ordinal concept, not cardinal. That is, all that matters is the order, not the number itself. So, if we can use simple numbers as long as we keep the order, why make it complicated?

Stay tuned.

---

¹ The text I’m referring to is Mas-Colell, Winston and Green. This book is one of the most elaborate modern microeconomics text. However, it is designed for graduate course. In one of its strongest part i.e. general equilibrium analysis, it uses differential topology, so you might want to consult some graduate math texts. Many times, students find it useful to combine this text with the more compact, Varian. If you want a good text for undergraduate level, we recommend Mankiw.

² Seriously, guys, this is just an illustration. I really don't care if you happen to like orange more than apple :-)

Econ 101

Capitalism is good (even for the poor)!

Loan sharks (rentenir; tengkulak; lintah darat) are always portrayed as the enemy of the society. As the name portrays, they are fierce predators of the poor farmers or traders. In Indonesian they are called lintah darat (leeches) because they live by sucking other people's blood.

Are they really bad? As usual, we economists do not have the moral judgements. We are more interested in why they exist. Well, simply they exist because there is an excess demand of capital. There are poor village enterpreneurs with high needs of capital to start up or expand their small businesses. However, for many reasons, they can not borrow from the banks. Perhaps because they do not have anything to serve as collateral. Perhaps because the scale of their businesess is too small for the banks to make a significant margin out of it. Perhaps because there are no banks around.

Loan sharks fill this gap. They offer accessible loan with small or no collateral. In some ways, they contribue to making the local economic wheel rolling. True, when the debtors fail to pay, loan sharks turn into true sharks. But the fact that they do exist and continue to exist means the demand for their 'service' is still high. (Remember also that by lending their money, loan sharks are also subject to risk and opportunity cost of money.)

Moral of the story: what the poor enterpeneurs need is access to capital. Not that they don't know how to do business. They do - but they just don't have the necessary capital.

Not that they need to be helped in paying the interests. Remember, many of them are able to repay the loan sharks' exorbitant interests. A study by LPEM-FEUI (thanks to my colleague Syarif Syahrial) showed that microfinance activities in Kuningan, West Sumba and East Sumba had no problem with unpaid loans even though they charged higher interest rate compared to the market price.

This explains why Adi Sasono's initiative when he was the Minister of Cooperatives and Small-scaled Enterprises during the Habibie administration (1998-99) failed. Assuming that SMEs were hurt by high interest rate, the government offered a subsidized interest rate for SMEs, at 13% compared with then market interest rate of 40-50%.

But people responds to incentives. Many new SMEs were established. But the motive was to be able to borrow at 13%, put it in the bank, then got the 30%+ interest margin. Who wants to do real business at that time, when the economy and security was very uncertain?

So, developing financial market and institution that reaches the poor is one important way to alleviate poverty. Since financial market is the backbone of modern capitalism, we can conclude that capitalism is good for the poor. At least, we can't conclude it is bad for the poor.

Rural finance

Nobel prize

I know this is a belated entry. But it would be ‘strange’ if we do not mention at all about this year’s Nobel Prize in economics. Columbia University’s Edmund Phelps was honored the prize in the age of 1973. Since I am no macroeconomist, I can not really comment on his works.

I know that he was among those who developed the “micro foundations of macroeconomics” approach, along with his compatriots Milton Friedman and Robert Lucas who had won the Prize much earlier. He also reshaped the understanding of Philip’s Curve and the relationship between inflation and unemployment. His other contribution was in growth theory literature: the “Golden Rule” of savings and capital accumulation. (Basically, we can’t save too much!)

Here is a summary of his work. See also a very good but concise explanation about his works in the Marginal Revolution.

A week later, the Nobel committee announced that this year’s Nobel Peace Price was honored, not our President SBY, but to Dr. Muhammad Yunus and an institution he established in 1976, the Grameen Bank. Here is my comment on that. One quote from my article:

… the Grameen business has worked not on a charity basis. Nor has it worked by eliminating market mechanisms. Many argue that market mechanisms are bad for the poor. This is an incorrect assumption. Poor people suffer because the market does not work. So the right thing to do, as the Grameen group has shown, is make the market work for the poor.

I also argued that, despite its success, don’t see Grameen Bank model or microfinance initiatives as a magic bullet for ending world’s poverty. Nothing is a magic bullet (that includes the so-many-priorities-at-the-end-it-has-none Millennium Development Goals, right Prof. Sachs?). This article has a similar tone.

Nobel | Microfinance

Bike attack...!!!

According to a Ditlantas Polri (err... how to translate this, by the way?) estimation, there are around 35 million motorcycles hitting the road in the country in 2006. That is 70 percent of total population of vehicle. The number is twice as much as that in 2002, or 2.33 times higher than that in 2001.

Yes, yes, incentives are all that matters. Traffic jam, cheaper than car, more certain than public transport, explain why more people prefer to ride motorcycles. It may also be good for the economy. Nevertheless, it explains why driving (and walking) in Jakarta becomes more and more difficult. And damn dangerous too...! In the Jakarta area alone, according to PDAT, the number of motorcycles is around 3.3 million (2003). It is estimated that the number increases by around 350 thousand per year. So in three years, motorcycle in Jakarta increases by more than a million (conservative estimation).

Traffic

Show some respect, please!

A banner in my neighborhood asked people to “respect those who are fasting” ("hormatilah orang yang berpuasa"). I tried to think, what is ‘respecting those who are fasting’? In my childhood, I was taught that it simply means not eating or drinking in front of people who fast. Perhaps if I someone who fasts sees me enjoying my meals, he or she will get tempted to break the fast.

But then, refraining yourself from eating and drinking (and smoking and having sexual relationship) during the day is the essence of fasting, isn’t it? Giving up one’s utility from eating and drinking is and individual choice. Then, respecting those who fast is a matter of respecting property rights and personal choice. When it’s a personal choice, no one is justified to force them to eat or drink during the day (or tease them or humiliate them).

Similarly, it’s an individual choice not to fast. And the non-fasting people also have the rights to remain eating, smoking or drinking. No one is justified to ask them to stop, in the name of ‘respecting the fast.’ And during the night, whether one was fasting in the day or not, one has the right to spend the night in café or pubs. The café or restaurant owners have the right to do keep their business open at any time. Nobody has any justifications to prevent anyone to go to restaurants at any time. Nobody possesses the right to force restaurants, pubs or cafes to close at any time. (Unless, of course, if the pubs create noise that prevent one from sleeping.)

The rights to perform fasting as a religious duty include the rights to tell others that it is already time to start fasting when they are OK to be told (or when they asked you to do so). Similarly, people have also the rights to remain sleeping and not being disturbed by ‘wake up calls’ from masjids or minutemen. Hence, in my opinion, those shouting ‘sahur… sahur…’ using megaphone from masjids are abusing own’s right, and violating other’s property rights. The solution is simple: use alarm clock, telephone, or if it necessary, put a sign in front of your house that you want to be waken up.

Another obvious thing, whether fasting or not, we do have the rights for a ‘petasan’ (explosives)-free environment. If we ever need the government during this Ramadhan month, it is to regulate petasan and noise from masjids. Not closing down business or night lives.

Back to the banner in my neighborhood. Usually, a banner is a signal of something. What does it possibly mean?

One, those who fast felt that they are not respected enough. Two, those who don’t fast have given enough respect, but those who do ask to be more respected. Three, it signals a kind of threat: respect us, or else…


Religion | Ramadhan

Efficient smoking

Ujang is also here in Canberra writing a cool paper on the economics of smoking. (I heard he has promised the manager "to café" some piece of it). So there we were chatting about the issue over coffee.

Ujang mentioned a study in U.S. that found that price policy can not effectively change smoking behavior in favor of health. That is, when the price of cigarette increases, the sales drop slightly, but the nicotine accumulation rate in the smokers' blood remain constant at the least. This finding seems to have bothered Ujang who hypothesized that in order to discourage smoking (and thus to promote healthy life), you simply need to increase the price of cigarette. But that study came up with the surprising conclusion. I think that's why Ujang decided to test his model on Indonesian family data.

But I guess what happened in that study was ... an increase in smoking efficiency as a response to the price change. That is, before the price increases, smokers tend to smoke inefficently: to smoke only half or three quarter of the cigarette and throw it right after, to smoke while talking at the same time (so as letting the wind contributes in consuming the cigarette), etc. When the price increases to some "decisive level" (that is, a level that can alter marginal buying), the smokers might reduce their buy. But they now become more efficient in smoking. They smoke until it really hit the filter, they don't allow "joint-smoking" with the wind, et cetera. As a result, the nicotine level in their blood stays constant. Or even higher.

A friend who was also in the chat, Dede, disagreed. He said that smoking style is hard to change. One might enjoy smoking only half of his cigarette (the taste might not evenly distributed across the cigarette). Another might like to see his cigarette burnt by the wind while he is composing a poem. And so forth. Well, being a chain smoker himself, Dede might be right, too.

Another friend, Aceh, had a better explanation. Because the cigarette becomes more expensive, smokers try to keep the smoke as much as possible inside ... their lung :-)

What do you think, smokers?

Update: Ujang just texted me. The measured substance in the smokers' blood was "cotinine" as a proxy of nicotine intake. My apologies.

Economics of smoking

Democracy: what kind do we want?

The 24th Annual Indonesia Update conference this year is themed "Democracy and the Promise of Good Governance". I've been thinking lately that the theme is too heavy. That is, the term "democracy".

What is it that we really want when we say we want democracy? The memorization machine back in primary school said: "democracy is a system where the people rule". And we took it for granted. Then there was a time when columnists thought it was more cool to say it in a latin expression: vox populi vox dei -- the voice of the people is the voice of god. Again, taken for granted.

But then. In "people" there should be many persons. It is unlikely that everybody agrees on everything. So whose voice is the voice of god? It seems, by what the memorized definition implies, that the majority's voice is. Therefore democracy means a system where the majority rules.

If that is true, I don't like democracy. Because it allows the tyranny of majority.

Better system, I believe, is the one when people are free to negotiate. Regardless of whether you are of minority or majority, as long as you can enter into negotiation without coercion, and there exists a rule of law that is respected by everyone, then any agreement that occurs should benefit both parties. Otherwise, there would never be any agreement in the first place.

Right, I'm not a political scientist. But am I that off? Or, really, what is democracy?

And Canberra is still cold.

Democracy

The 2006 Economic Freedom Index

Let me begin by reporting that Aco had just stolen the show of the 2006 Conference of the Economic Freedom Network Asia in Kuala Lumpur. By arguing that Free Trade Areas or Preferential Trade Areas are basically an impediment for the real free trade, he was crowned as the true liberal in the forum of Asian liberals. OK, I am exaggerating. There was no crowning ceremony. But at least, in the forum Aco was called an (liberal) activist. Not only liberal economist, but activist...

Also in the conference was the launching of the 2006 Economic Freedom of the World Report and Index. According to its official publication, the Economic Freedom Index was based on Milton Friedman's concept of economic freedom:

[it] measures the degree to which the policies and institutions of countries are supportive of economic freedom. The cornerstones of economic freedom are personal choice, voluntary exchange, freedom to compete, and security of privately owned property. Thirty-eight data points are used to construct a summary index and to measure the degree of economic freedom in five areas: (1) size of government; (2) legal structure and security of property rights; (3) access to sound money; (4) freedom to trade internationally; and (5) regulation of credit, labour and business.

One hundred and thirty eight countries was surveyed in the 2006 publication (the 2006 report publishes the data in 2004). The index takes value of zero to ten; zero means completely unfree, and ten means completely free. The overall index is based on 38 data points measuring the five components. In each component, each country also received the 0-10 score. The index is constructed from various secondary data. So it is not a direct survey of perception or a panel expert.

As the other indices (Human Development Index, Freedom House Political and Civil Liverty, Polity Index of Democratization, even Consumer Price Index), of course the Economic Freedom Index may suffer from the typical problems: measurement error, construction, defintion, level of aggregation etc. But still, it is worth having it as a quantitative measurement of quality of economic institution. The thing is, we need to be cautious in interpreting the data and translating into policy action. But let's just have fun and see what it says.

Hong Kong and Singapore are the two most free economies in the world, followed by Switzerland, New Zealand and the United States. Venezuela, two Congos, Myanmar and Zimbabwe are in the bottom five. Although Hong Kong and Singapore tops the overall score, they are not always the first in each categories. For example, El Savador ranks first in the 'government size' category; Denmark in the 'legal system and property rights'; Sweden (access to sound money) and Iceland (regulatory).

Taking a cross-country analysis, the Economic Freedom Index score is positively correlated with Human Development Index, life expectancy, income level of the poorest 10%, environmental quality and access to improved water sources. Meanwhile, it is negatively correlated with infant mortality, unemployment, share of children in the labor force and corruption. Of course, we can't imply anything from this correlation because it suffers from the usual reverse causality and omitted variable problems. But these simple correlations can at least challenge a popular perception: that liberalizing the economy is bad for the poor and quality of life in general.

Generally, countries with better EF Index also score better in the Freedom House' civil and political liberties. But we may see countries like Singapore, United Arab Emirates or Kuwait who are under the 'partially or totally unfree' politically score well in the EF Index. (We can also add Hong Kong in the list if we consider it is part of China now.) However, those who economically are not free are consistently not free politically. Note that we are still unable to answer what causes what. Whether economic freedom causes political freedom or vice versa, or nothing causes anything, is still an open field to disagree.

What about Indonesia?

The country's overall score in 2004 is 6.0 -- it ranks 83 out of 132 countries in the survey. Lower than Malaysia, Thailand, the Philippines, even Egypt and Iran (!). Well, at least Indonesia ranks better than the likes of Vietnam, Brazil, Turkey or Fiji.

The country's score in 2004 is lower than that in 2003, in which it ranked 73. Breaking down by components, the country's government size score is not different from that in 1985, the period when Indonesia just started the deregulation (and worse, means bigger, than that in 1990-2000). Regulation quality score is worse compared to 1990, and virtually unchanged during the 2000s. Legal system and property rights is also worse than that in 1985, 1990 and 2003 (although higher than that in 2000 -- if that's something to cheer about). The country also scores lower in the access to sound money category compared with 1985-90. Although in terms of freedom to trade internationally, the situation in 2004 is much better than in 1985-90, althogh worse than that in 2000.

So who says that our economy is getting freer and more liberal?

Economic Freedom Index

Discriminatory trade arrangements

Yes, that is what the Free Trade Areas (FTA) should be called. An FTA is not free trade. It is a PTA, preferential trade agreement/arrangement. And "preferential" means discrimination. Suppose we have JFTA -- Jakarta Free Trade Area. Goods exported by West Jakarta to North Jakarta are tariff-free. But goods from Depok, Tangerang, and Bekasi are imposed some tariff if to be sold in Jakarta area. As a result, they can't compete with goods made in Jakarta. What do you call this, free trade? Nope. It's discrimination.

Suppose again, labor from Tangerang are cheaper than those of West Jakarta in producing hats (I use hats here, so that I can assume similar technology, no?). In the absence of tariff, Tangerang-made hats should be cheaper than West Jakarta-made ones. In the meantime East Jakarta doesn't produce hats. But their people like hats. Which hats they would rationally buy? Tangerang hats, of course. But what is the main goal of JFTA? To make the Tangerang-made hats less competitive. That is, by imposing the damn tariff, JFTA makes the Jakarta-made hats cheaper. Or more precisely, deceptively cheaper. East Jakartans now are buying hats from the inefficient West Jakarta's producers. And you're calling this free trade? Give me a break.

That was the main point in my presentation this morning in Kuala Lumpur for the 8th Annual Conference of Economic Freedom Network Asia. The theme this year is "Preferential Trade Agreements: Local Solutions for Global Free Trade?". Of course I wasn't talking about my imaginary JFTA. I was concerned with all the current movements in the region toward PTAs (and other type of discrimination, bilateral trade agreements, BTAs). I know WTO's Doha Agenda was fractured. But at least, if you really have to have some kind of "clubbing", do it on MFN (most-favored nations) principle. That is, a non-discriminatory way. And if you don't want the "spaghetti bowl effect" (boy it's messy), try unilateral improvements at home. While waiting for the WTO's major surgery.

Oh by the way, the Network also launched the 2006 Annual Report of Economic Freedom of the World. As usual, the Report has some interesting stuff inside, including of course the Economic Freedom Index; and now with a special chapter by William Easterly. Ape, who's also here will be talking about that. Ape, the floor is yours.

FTA | PTA | WTO | Economic Freedom Index

More on education and contraception

Now I've found an interesting pattern. Discussing polygamy or condoms is how to get many comments and hit rate.. :-) Many thanks for the comments on my previous posting. I was about to make a response to some comments, until I realize my reply worth a separate entry.

Then Yudo mentioned about the need to estimate the effect of education on different contraceptive methods. Actually, that was what I did. In addition to 'any modern method'* I estimated four different methods: 1) birth pills, 2) IUD, 3) periodic abstinence, and 4) condom. There four represents different 'levels of difficulty.'

In terms of difficulty, birth pills are moderate. It is easy to use, but requires some careful attention and understanding on how to effectively use it. IUD is easier -- you just come to the clinic and let the doctor do that for you. But on the same time, you need to have knowledge or awareness and access to the clinic. Periodic abstinence is, well, difficult. A lot of careful calculation is required. Condoms, on the other hand, is no rocket science.

My prior hypothesis is that the more difficult a contraceptive method is, the higher is the impact of education on the probability of using it. So, this is another way to estimate the return on education. But, as I mentioned earlier, I found no statistically significant impact of education on the probability of using the first three. The reason was because the family planning program in Indonesia has been quite successful. So regardless of education and wealth, Indonesian women has relatively had high knowledge and access to contraception.

Interestingly, for condoms -- the easiest method of those four -- the coefficient is (marginally) significant. Meaning that the probability of using condoms still depends on the level of education. This opens the room for more exploration.

Remember that unlike pills, injections or IUD, the use of condoms put the responsibility on men (husbands).** Remember also the unbalanced relative position between men and women in terms of sexual relationship and behavior (read: men are less responsible). For women, more schooling may mean two things: 1) more bargaining position in the household, and 2) higher chance of getting a more educated, more responsible husband.


* Modern method = the term to distinguish 'traditional' or 'folklore' contraceptive method. Boys, please be informed that asking your girlfriend to drink Sprite or jump up and down after having sex is not a modern contraceptive method! It is not even a method...!

** Still yet to find the story for periodic abstinence.

Fertility | Education

More education or condoms?

We congratulate Aco and Anna for their new born baby. Now they have officially contributed to the population growth. As a present to the couple, our entry is about demand for children and education (yes – we can’t avoid talking about education again…).

Economic models generally show that, everything else constant, high population growth is bad for economic growth. For some people, high population growth is a reason why poor countries are poor (“the rich gets richer, the poor gets children”). Let’s say this is true. What makes people in poor countries have many children?

According to the demographers’ view, the answer is unmet needs for contraception. Since they are poor, they can’t afford to buy contraceptives. Hence, the appropriate intervention would be family planning campaign.

Many economists reject this idea. Even in poor countries, condoms cost no more than cigarette or coke (Easterly 2001). So, if they want to reduce the number of children, poor people can in fact afford to do so. This means that high birth rate in poor countries are actually desired. The desired fertility argument (Pritchett 1994) is based on the fact that some markets are missing or imperfect: labor, insurance and even goods market. That makes poor families rely on their children for cheap workers and old-age social security.

Only when the income level is higher, people will demand fewer children. Higher level of national income usually correlates with more availability of formal insurance system. Higher income can also be translated to higher level of parents’ education. This will give more opportunity to enter the labor market, so there will be a trade-off between working and childbearing which then lead to a substitution between quantity and quality of children. We can also say that when people are more educated, the effectiveness of contraceptives will also be increased (smarter people knows better how to put condoms or calculate women’s fertile period, eh?).

In short, development is the best contraceptive, said economists. Or, in a narrower version, education is a good, if not the best, contraceptive.

How true is such premise? I am currently doing a research on that.* Using household data from the Demographic and Health Survey, surprisingly, I found that there is no significant correlation between mother’s (as well as father’s) years of education and number of children.** No such correlation also exists between education and ideal number of children.

The data does not allow me to test the impact of education on the labor market participation. But let’s assume it to be positive. The reason must be that education does not explain contraceptive use. And yes, the data confirms that. I did not find any positive and significant impact of education on the probability of using modern contraceptives such as periodic abstinence or birth pills. There is only a marginally significant impact of education on the probability of condoms.

So does that mean that economists or the pro-education camp lost the intellectual battle?

Can’t say that too fast. The thing is the survey was conducted in 2002/03. Three decades after the family planning campaigns by the Indonesian government (BKKBN) has been considered success. Thanks to the campaign, (poor) people have had the knowledge on and access to contraceptives, regardless of their education level. You don’t need to be that smart to know where to buy condoms or pills and how to use them.

Put it more scientifically, we don’t have the counterfactuals. What would have happened if there was no family planning campaign in the ‘70s-80s? Maybe we can ask our colleague Arya Gaduh to conduct a randomized experience to answer such question.

Notes:

*) The research paper is currently being written. I will post an update if it is available.

**) For the methodology-oriented people, I have corrected the reverse causality and omitted variable bias by applying 2-stage least square estimation, using quarter of birth as the instruments (see Angrist and Krueger 1992).

Fertility | Education | Demand for children

Econ101: Marginal and Relative Analysis

Economists -- at least your Café economists here -- don’t really care about big changes. We are into details. Meaning, we are more interested in small changes. What happens if I blog one more hour? Am I still as good as the last entry? How many minutes do I need to write one more posting? What do I have to sacrifice, in minute-equivalent?

People make decision based on marginal analysis. No? Well, yes, although you might not realize it. Remember when you were eating nasi goreng and chicken nuggets? You took a portion of nasi goreng and some, say four pieces of nugget. Then you were running out of the nasi while you still had one nugget remaining. And you were not full yet. So you decided to add nasi -- just enough to go with the lonely nugget. Then you’re satisfied. Sounds trivial. But congratulations, you just ran a marginal analysis. The “just enough” is the key there.

Still remember our first discussion? Yes, we talked about cost and benefit. We said, people do something when the total benefit of doing it outweigh the total cost. How does that relate to our marginal analysis? Here is the mantra: You do not stop doing whatever you are doing until the “marginal benefit” equals “marginal cost”. (At this point I’m tempted to use graphs and math – much easier; but let’s just talk – more fun).

You are doing two things at the same time.¹ You’re assigned to organize a seminar. It is time now to call participants. But as usual, you just activated your yahoo messenger – you are now e-chatting with that cute someone out there. We can look at this from either side: your calling the seminar participants or your chatting with that guy. Believe me, the result will be exactly the same, but let’s just take the latter.

What is the cost of your chatting? This is the time you’re supposed to apply your opportunity cost concept. Yes, the cost of your chatting is the next best alternative use of your time. Since you have to work to earn money, the "cost" here is therefore the number of calls you don’t do. Now let’s do the game. If writing one more sentence to him and making one less call to participants makes you happier, you will rationally delay the call and do the chatting. You will keep doing this until you start “feeling guilty” of not doing your work (calling seminar participants).² Until you are indifferent between chatting and calling. The additional pleasure of chatting is fully compensated with a guilty feeling of not-calling. Economists call this a situation where “marginal benefit equals marginal cost” (Forgive my abbrev: MB = MC). Since you will keep chatting if the marginal benefit of chatting outweighs the marginal cost of chatting (or: You will keep calling if the marginal benefit of calling exceeds the marginal cost of calling – See? It runs both ways!), this state of “MB = MC” is therefore optimal.³

Now I’d like to add one more thing. We prefer relative- to absolute measures. Everything absolute that stands alone (that is, without benchmark) is useless.⁴ We are impatient with people talking in absolute tones: “What is the 2005 Indonesian GDP?”,⁵ “How much is the Manager’s salary?”, “What are we good at?”, or “How many Indonesians are poor?”. Rather, we ask: “What is the growth rate of Indonesian economy?”, “How much raise did the Manager get?”, “What is our comparative advantage against Malaysia?”⁶, or “What is the poverty rate now?”. Relative analysis allows you to mentally picture what is really going on.

Stay tuned.

---

¹ Of course, in super marginal world, you can’t really do two things at really the same time. Only that guy in StarTrek can do that.

² This is a term to actually say, your cost is increasing.

³ More on this yet another key concept, later. (Man, I keep promising…Sorry...)

⁴ Of course, two absolutes qualify for a comparison, which is good enough.

⁵ GDP stands for gross domestic product. It is also called national output, national expenditure, or national income. Please be patient with this confusion. More on this later.

⁶ Saying something like “Indonesia has a comparative advantage in palm oil” is meaningless. Compared to whom?

Econ 101

From the Manager

The Café welcomes a junior member.

But, Fleetwood Mac?

Econ301: Education and labor market signaling

Note: while Aco continues the Econ 101 series, allow me to squeeze in with some more advanced topics. Usually, in our university, the better teachers are assigned in introductory courses. In our cafe, the manager assigned Aco, our best barrister, to serve the younger, funkier customers...

Updated note: a version of this entry was published in The Jakarta Post (15/8/06).

Why do many people hopes to get higher education, university degree in this case?

The most common answer is because having a university degree makes it easier to find job. Actually, this is not the correct answer. Several researches have shown that people with high school diploma or lower have greater chance to be employed or to switch jobs. Especially after the economic crisis, people with higher education are more likely to be employed. The correct answer is: to get a better-paid job. True, university diploma does not make it easier to get job. But certainly it enables one to have higher salary.

Why then higher education gives higher earning? The answer seems to be obvious. Education provides workers extra skill, which enables them to be more productive. Since workers are rewarded in the labor market based on their productivity, it is the higher productivity which brings them higher earning. Hence, the higher one’s educational attainment, the higher his or her wage. This is the Beckerian answer to the problem.

But such view was not too convincing. Labor market, like any other market, is not perfect. Employers can not evaluate the true productivity of potential workers before he or she starts working. But we know that typical job application process, the wage rate is agreed in advance.

So, on what basis will wage rate be determined?

According to Stanford University's Michael Spence, in the world of asymmetric information, employers only assume higher educated workers are more productive. Not that a college graduate in is actually more productive; it is what the employers believe to be. So, to distinguish oneself in a stack of application, a job searcher shows his/her university diploma to signal the prospective employer that he/she is a productive type. In other words, higher wage is a reward for the diploma one gets, not a worker’s true productivity.

He wrote his seminal article in 1973 [1] - and his model was then called "the signaling model." Spence won the 2001 Nobel Prize in economics, together with George Akerloff and Joseph Stiglitz.

What does the model imply?

The signaling model changed the way people looked at how labor market works. The fact that signaling mechanism partly, or mostly, determines the market wage setting has an important implication. University degree helps increasing wage as long as those with university diploma accounts for only a small fraction in the labor market. When the share of university graduate grows, it will no longer be an effective signal. Employers will look for new type of signals to distinguish workers, such as more advance degrees (Master’s, Ph.D.), professional degrees (CPA, CFA), or graduating from 'top' universities (err... UI?).

When the government subsidizes university tuition fees, it makes higher education cheaper and more accessible. It will increase the supply of college educated workers. However, it may not be useful because employers will increase their expectations subsequently. For that reason, subsidizing university tuition does not make a good social investment. It may even have an adverse effect: a large pool of highly educated unemployment.

[1] Spence, A.M.: "Job Market Signaling", Quarterly Journal of Economics Vol. 87, No. 3 (1973), pp. 355-374.

Education | Labor market | Signaling

Econ101: A Starter

What is economics? It's all about choice and choosing. Things are scarce. So we make choices. Economics¹ is a way to explain why some guy chooses a banana over an orange, given the money in his pocket.² That's all. Never mind the long and boring definitions in the textbooks. When somebody wakes you up in the middle of the night and ask what economics is, just remember one word: CHOICE.

What is the implication of scarcity and the act of choosing? Tradeoff. When our guy chooses the banana, he gives up the opportunity of having the orange. We say, the opportunity cost of his having the banana is his foregoing the orange.³

How does he choose? By comparing the benefit and cost of the action.⁴ What does it tell us when we see the guy ends up eating the banana? It tells us that for that guy at that time, the benefits of eating banana exceeds the costs.

When "the guy ends up eating the banana", he is revealing his preference. That is, without telling us anything, we have an information about his preference. This is called revealed preference (RP). Or, it can be that he just tells us that he prefers banana over orange. This is stated preference (SP). We tend to believe RP more than SP. Whenever what you do contradicts what you say, we believe the former.

But why do we rely our analysis on what people do? Because we assume people are rational. That is, people do whatever best for him at any given time. Is the assumption alright? Think about a person playing billiard. Is it alright to assume he is rational? That is, is it safe to assume that what he would do is consistent with the physics dictum that "the angle of incidence equals the angle of reflection"? We think it is safe. But there are crazy people, no? Yes, but there are definitely more non-crazy people out there then the crazy ones. So we're fine.

Should the guy eat the banana? We don't know. What we do know, by way of inference, is the guy prefers banana to orange. And as a rational person, he eats the banana. So, when you offer him to choose between the two, he would take the banana. This is a positive approach to economics, as opposed to normative approach. Positive approach is all about "what is" or "if X then Y". Normative approach is a matter of "what should be". We are more confident in positive approach. In fact, we try not to do normative approach. And we encourage you not to believe economic analysis with too many "should"s in it.

Stay tuned.

=====
¹ In this Econ101 series, all economics keywords/phrases will be highlighted like this.
² From now on, we will be using masculine pronouns. Blame the convention.
³ This is a brutal simplification. The guy can choose to have half banana and half orange. Or the story might as well be: choosing between sweet orange and sour orange, the latter being cheaper for an obvious reason. But don't worry about this complication now. Opportunity cost is central to economics, so we will devote another whole posting for it sometime later.
⁴ You might say, "Well, no, I don't do that". Trust us, you do -- in one way or another.

Econ 101

From the Manager

What is it, three, four weeks? Yeah, I haven’t been playing music. But I’m sure you’re all fine with your iTunes or LimeWire. Or even cheap MP3 compilation CDs. What, like I don't know why you bought a 2 giga iPod?

I don’t owe you explanation, yes? But I feel like telling what I’ve been doing, besides pretending to understand economics. I’ve wandering around. To see other people’s cafes. Hanging out at an adorable competitor, Café Hayek, stopping by at a new café, Kedai Kebebasan, and listening people talk on modern politics at TPM Café. Or just to test the brain endurance at the Philosophy Café.

Of course I went shopping, too. I just bought a set of Acoustic Wave for the Café. Love the sound it delivers. And some books to keep you staying: Umberto Eco, Milan Kundera, Astrid Lindgren, and J.D. Salinger (they’re used books – since some of you are kleptos; hey, who took my thesaurus? I'm trying to show off, here, please!). I’ll put them on a new bookcase next to the old gamelan. No, I’m not gonna install a flat screen – you can borrow my Hicthcock collection, but go see movies somewhere else. As for games, I have bought three sets of scrabble. No chess or checkers – too trivial and boring.

Sounds like we’re gonna have more fun. Come, come. (No, we don’t have skin tax like them!)

Did I mention music?

Now I’m thinking Enya. Oh, she’s so relaxing. I’m carried away by her mystical soft mantras. It feels good. Especially after an aggression from a lesbian guy across the street.

Update: Shoot! I've linked too much to Wikipedia. Apparently, it ain't good.

Language grows, not imposed

This news tickles me (NOTE: I have just updated the link, thanks to Patrick Hall at Infundibulum -- here's Patrick's take . The Jakarta Post has moved the original article.). It's about some Indonesian "top linguists" complaining about the Indonesian government's deal with those of Malaysia and Brunei to use Malay as the official language in the countries.

What a nonsense from both sides. The governments, do they really think they can force the people to only use Malay language? The linguists, do they really think they can force Indonesians to stay with Indonesian language? Just because "Indonesian is much more developed than Malay"? Or because it is "studied in many countries"? Give me a break.

Call me a non-nationalist, but I don't buy all this crap about "national language". Look. I love Indonesian language (it's the simplest, no?) and I hate Malay ("perogolan", "berseronoklah" -- Man, I hate how they sound). But I will understand if Malaysians don't like Indonesian sound of "canggih", or the mental image of "rumah sakit".¹

People communicate, regardless of what language they are using. As long as you understand what I mean and I understand what you mean, we're fine. Misunderstandings might arise, but that's how language develop in the first place.

That is to say, language is like market. It is supposed to be free. Non-imposed, non-enforced. It grows as people need it. Let people choose how they communicate. There were times when people thought they could impose some new words. And they failed. Umberto Eco told us a story about it. The Italian fascists tried to force people to say "mescita" instead of "bar". They failed.

Anyone still remember the words "sangkil" and "mangkus"? <sup>2

1</sup> "Perogolan": rape (the noun), "berseronoklah": have fun, "canggih":sophisticated, "rumah sakit": hospital.

² "Sangkil": "efisien": efficient, "mangkus": "efektif": effective. Or, is it the other way around?

Language

On Reason to Blog

Why do economists spend their time blogging?
The Economist, I mean the magazine, has some of the answers:

#1. “It's a place in the intellectual influence game,” Mr DeLong replies; and “It's a natural extension of my day job—to engage in intellectual discourse about economics,” Mr Mankiw says.
#2. Although there is no evidence of a direct link between blogging and publishing productivity, a new study by E. Han Kim and Adair Morse, of the University of Michigan, and Luigi Zingales, of the University of Chicago, shows that the internet's ability to spread knowledge beyond university classrooms has diminished the competitive edge that elite schools once held. (my word: to screw up the university's ivory tower)
#3. Blogs have enabled economists to turn their microphones into megaphones. In this model, the value of influence is priceless.

Now, assume (economists love to assume, some said) we, the hosts, are economists (we're economists, aren't we?) : What do you think our motives to deliver something that our Manager often despises as non-sensical in this cafe are?

I don't know about other hosts. But come to think of it, for me, none of abovementioned causes seem applicable. I do blogging for fun. OK, more precisely for showing you that economics can be, and is indeed, fun (and it's fun to read the comments, too). And trust me, the money from the Manager is a shame.

You don't buy it and raise your eyebrows? Fine. Allow me to spill a small secret. For Aco, AP and even Ujang (I don't know about Sjamsu), they blog to woo women.

OK, Rizal, too (I see them throwing cups at me)

Blogging

Selling the Road

So you’ve been dispatched to investigate illegal payment on the road made by truck drivers in an attempt to measure cost of transporting goods. The best way to do this, of course, by taking a ride with them and directly observing how much and how frequent such payment occurs along the trip.

And since you are in this country, you may, understandably, assume that they would pay large sum and frequent bribes on the road.

Equipped with this knowledge, thick questionnaire, GPS gadget, and two packs of cigarette, off I went to the one leg of Trans Sumatra East Route in North Sumatra.

You know what, it was fun. And I was surprised that in that 9 hours trip, 298 km long, the truck that I rode did not pay any single payment. Not a single one. Not to policemen, DLLAJR (Road Traffic Authority Office), or preman (thugs) –the common culprits for such crime-. I knew that the other trucks paid some money in three weighing stations along the way, but since my truck did not violate weight limit, they let us go freely.

Is that good news? Scroll down.

But then I learned from my conversation with my truck driver buddies that each of them has to pay monthly payment to three organizations associated with the military and police in return to security protection in that particular route. And in this case they deliver the services –-no additional payment apart to them--

This is indeed in accordance to Shleifer and Vishny (1993), who wrote that the most efficient market of corruption is when it is very fragmented --numerous agents charging the fee are in fierce competition, so that the utility and cost of bribe met at the lowest possible price of bribe.

The worst case is when it is only partially fragmented. There are numerous agents, in less competition, uncoordinated, and can cancel each other’s service. It is like, A doesn’t give a damn whether you have already paid to B. Because B can not imposed their role against, or control, A. And vice versa. This kind of noisy harasshment happened in another route surveyed in Sulawesi, as my colleague reported.

The second best, or worst, you may say, case is when organized agents who can impose the rule –security protection here-- against the potential suppliers monopolize the market of bribe. And this is what I experienced. Those agents take the money, but at the same time deliver the services.

You may then ask: Would the illegal fee –approximately 350K IDR per month—too high? I don’t think so. They know that they have to keep their subjects –the truck drivers—alive, so they won’t rip them off excessively.

In this setting, you need powerful agents to monopoly the market. What are the sources of power? Well, ability to enforce violence and money. And this is why those organizations are not only associated with military, but also capital owners, who happens, coincidentally, to be Chinese ethnic, the tauke.

Is that good news? You tell me.

Corruption

A cake solution for our leaders

You’re a mom with two naughty kids. Whenever you bake a cake for them two, you would end up with a headache. They always fight over the size (“Mom, why do I get the smaller piece?), no matter how even and accurate you think you have divided the cake with your expensive knife. What’s the solution? Economics offer you one: let them choose. Try this: toss a coin. If it is “Garuda” the first kid will move first. If it is “500”, the second kid moves first. Suppose it is “Garuda”. The first kid would have to slice the cake. Then the second one would choose which part he or she wants. The first kid would have the remaining part.

Did the story ring a bell? Maybe it did for you who happened to share an apartment with another tenant. Say, you two are to decide who would take which room. Alas, the two rooms are unequal in size. What to do? Try this: toss a coin to decide “who moves first”. Supposed it’s you. Now, you assign a "price" to each room. By "price" I mean, the share in the total monthly rent: bigger room has a bigger share; whoever happens to get it he or she should pay more than the other. Alright, have you assigned the "price"? OK, your job’s done. Now your friend would have to choose which room he or she would take.

Sounds simple. What about if there are three kids? Four? Three, four tenants? Well, we can do it, too. It’s just slightly more complicated. Therefore we have game theory¹ courses.

But forget about school. Let’s apply this to something the media (and the so-called "communication experts") really likes to rant about. It’s the “race” between the two CEOs of the country, SBY and JK.² The President and the Vice President seem to always try to outdo one another in delivering official statements (and even official actions). So far, JK scores higher: he’s very quick in taking decision (good or bad) and acting accordingly (or not accordingly, I should say), while SBY is very careful (too careful, he seems depressed).

We love our leaders. So how about suggesting a fun solution (at least to shut the media up)? Yes, the "cake solution"! Try this. Let the House, DPR, toss a coin. Suppose SBY gets to move first. Then he will list all statements and actions to do this month. Then divide it in two blocks. Next, let JK choose which block he likes to execute…

I know, who says running a country is easy?

¹ Game theory is an amalgam of math and econ. Math teaches you the logical steps in playing chess. Econ explains to you why you would want to play those steps.
² Susilo Bambang Yudhoyono and Jusuf Kalla

Game Theory | Susilo Bambang Yudhoyono | Jusuf Kalla

Voting, anyone?

Alright, this is my first time trying to understand economics. I've been dealing with these guys in the Café and I've started to think that their way of looking at things is not that bad, despite all its nonsense. (Or, maybe I just want to have a posting title other than the boring "From the Manager").

What triggered me was a news from Jakartass. The Café is nominated in a so-called Asia Blog Awards. Not bad, I think for a not-so (social-) capital intensive café. So I was thinking: should I myself vote? I remember Aco once wrote that in a voting that involves many voters, it might not be rational to vote. So I called him up.

Me: Aco, do you know the Café is nominated for an Asian blogs award?
Aco: Yup, I heard that. Congratz, Manager!
Me: I remember you once said that voting might be irrational...
Aco: Yes. Freakonomics did, too. Only a year later.
Me: Now, do you think I should vote?
Aco: For whom?
Me: ??? for Amien Rais! Of course for the Café, you idiot!
Aco: ... Easy, Boss... OK, how many people do you think will participate in the voting? 200 million?
Me: No! Even 200 will be a surprise. Let's say a hundred... Or maybe 50 -- They only give us 3 days to vote, can you believe it?
Aco: Then, vote. Your voice might count.
Me: ... why?
Aco: The marginal value of one vote is higher when the participation rate is low. In a million-voter election, your vote contribution is negligible. In a 15-voter game, your vote is decisive.
Me: ... Makes sense... By the way, the system is such that, every voter should rank nine candidates. What should I do?
Aco: ... That's interesting. OK, tell me who do you think is your stronger competitor?
Me: ... (I named one blog)...
Aco: What? You think that blog is good? ... (I was ready to argue) ... OK, OK, calm down. I respect your judgement. Now here's a trick. That blog, the one you think might give you hard time in the race, rank it the last.
Me: Why? Shouldn't it be the second ... (of course I mean after the Café)
Aco: No, put the weakest one you think in the second place -- I assume you'll put yourself in the top. Next, put the second weakest in the third place and so on... I presume there will be some averaging in deciding the winner. Then you have to make sure that your strongest opponent gets low point.
Me: ... Got it. I'll do that. Thanks. .... Will you vote?
Aco: No.
Me: Why?
Aco: Only if you give me a raise...
Me: Go to hell...

Voting | Rationality