The Economics of Oil Muffin Price

Let's talk about a commodity, a muffin. This week the price of muffin goes up significantly and sets a new record after 20 years. People raise their eyebrow. Some point out that it is the work of muffin cartel, but it seems implausible since like any cartel, its member tends to break the agreement, produce muffin above agreed number, much more when the price is high.

It turns out that there is a sharp increase for demand of muffin coming from new growing-rich customers, Rizal and AP, while at the same time, the demand from traditional muffin eaters, the Manager and Aco, remains high. On the other hand, the muffin producer, Ujang (and his cartel gang) and Sjamsu (outside the gang), due to some technological capacity problem, can not increase the supply.

No wonder, as any Econ 101 student understands it well, the price goes up. Neither speculation nor conspiracy theory is at play.

Now, for some reason, you want the price of muffin down. One way to do that is to boost the supply, which is as we know, Sjamsu and Ujang can not make it. The alternative is then to reduce the demand of muffin. Econ 101 tells you that the rise of price will automatically bring substitution effect --Rizal and AP and Manager and Aco would somehow eat less muffin and more schone, sooner or later. The price signal itself would lead you to the new equilibrium (how much muffin, schone, and any other goods to consume) based on the new scarcity problem. It is called the market mechanism, an invisible hand.

Now, do you think an answer on how to tame soaring muffin price is to ask for a deliberate collective sacrifice from Rizal, AP, Aco and Manager to reduce their appetite for muffin; Sjamsu and Ujang to add up production, no matter what; and the Manager to stop bullying Ujang's friends: is a plausible one?

Hint: read one of op-eds in Kompas daily, page four, Monday, Oct 29, 2007. It's available online, too.

Economist wanted

For Sutiyoso's presidential running mate.

How The "Seurieus" Misunderstands Jazz

Now you have pretty rough idea on the musical preference of your barristas here. AP's for classic rock, the likes of Megadeth, Stryper, and Van Halen. I prefer jazz of Bill Evans and Brad Mehldau. Aco's fond of Miles Davis, Branford Marsalis, and, if I make no mistake, Koes Plus. Sjamsu plays The Police. And The Manager loves jazz, and until recently, hip-hop.

So you may say that we have different taste of music, and sometimes, it changes, like The Manager's swing preference to Beyonce. But do we really have different taste --and anything that refers to the term is better left to non-economist, say, psychologist ?

Gary Becker and George Stigler of University of Chicago said no. The taste neither changes nor differs significantly among people. In other words, my musical taste has no difference with AP's, and The Manager's taste on music doesn't change from pretentious jazz to cool hip-hop. Taste remains the same for everyone and at anytime.

Sound outragoeus? Not so, if you care to read their classic paper "De Gustibus Non Est Disputandum", AER, Vol 62, No.2, 1977. In their framework, the reason why I like jazz but not classic rock like AP does is not the difference of taste between us, but consumption capital accumulated for jazz. I happen to have more jazz consumption capital (and less of rock music) than him.

Having more jazz consumption capital, my marginal utility (additional leisure) of time allocated to listen to Evan's Waltz for Debbie increases --and higher than my marginal utility of listening to any of Megadeth's album. Because of that, I'd say that I prefer the former than the latter.

In the case of The Manager, her taste doesn't change, but her capital consumption on hip-hop now goes up, probably because she's watching MTV more or read gossip news about Beyonce lately, or her new guy Charlie happens to be a hip-hop fan.

So next time you hear the "Seurieus"'s lyrics "Daripada musik metal, lebih baik musik jazz" (liberally translated: In comparison to (heavy) metal, jazz's better), think again.

The economics of witchcraft

A cute paper by Emily Oster (a former TA of my Econometric class at Harvard, now at Chicago), published when she was a student. An excerpt from the paper:

This paper explores the possibility that the witchcraft trials are a large-scale example of violence and scapegoating prompted by a deterioration in economic conditions. In this case, the downturn was brought on by a decrease in temperature and resulting food shortages. The most active period of the witchcraft trials coincides with a period of lower than average temperature known to climatologists as the “little ice age.” The colder temperatures increased the frequency of crop failure, and colder seas prevented cod and other fish from migrating as far north, eliminating this vital food source for some northern areas of Europe (Fagan, 2000).

On witch hunting -- here's a documentation of my visit to Salem, Mass. A place famous (or notorious) for the 17th century witch hunt hysteria.

Polygyny and why male live shorter

Take the life expectancy statistics of any species. For most species, including human, female live longer than male. Among many theories, my favorite one (at least for human) is "male is the defect version of female." Remember that male have the XY chromosome, while female have XX. 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.

A new research, cited in this article, offers another perspective: polygynous practice leads to shorter male life expectancy . According to the article:

In 16 of the 19 polygynous species in their sample, males of all ages were much more likely to die during any given period than were females. Furthermore, the older they got, the bigger the mortality gap became. In other words, they aged faster. Males from monogamous species did not show these patterns.

The point about polygyny, according to Dr Clutton-Brock, is that if one male has exclusive access to, say, ten females, another nine males will be waiting to topple the harem master as soon as he shows the first sign of weakness. The intense competitive pressure means that individuals who succeed put all their efforts into one or two breeding seasons.

The implication for human is:

Dr Clutton-Brock reckons that the sex difference in both human rates of ageing and in the usual age of death is an indicator that polygyny was the rule in humanity's evolutionary past—as it still is, in some places.

Well, at least it adds to the debate on the good and bad side of polygyny.

Yes, we were students too!

Sometimes, many times, this Cafe's barristers talk about our students. Our favorite topic is how do they cheat. Or, to be precise, 'how do they cheat stupidly.' Well, frankly, it's hard to know if they cheated in the exam. It is usually easier to detect plagiarism in an essay or paper assignment. And it is very easy to detect a clumsy plagiarism.

I'm sure it happened to the other lecturers, one way or another. But I did experience my articles being plagiarized. Aco once told me that one of his former students copied-and-pasted a few paragraphs of my article for his term paper without any citation. A worse case, reported by Rizal a few days ago, was when his student submitted my other article -- yes, a full article -- for his/her assignment (Rizal did not specify gender, and I did not care).

But I happened to have a first-hand experience of the stupidest plagiarism ever. A few years ago, my student even submitted my own article for her final assignment. Not only she was too lazy to write her own assignment. She was too lazy to check the stuff she was stealing!

We economists know very well that people (students) have incentives to cheat. But what we don't understand is why they do not bother to do it smart. Come on. We are lecturers and researchers. Reading newspaper articles is our job. Sometimes even we're the one writing those articles. At least, we are friends of the authors whose article you steal.

I once tried this way. In the final exam I asked one question: "write the title of your essay assignment and summarize it in one paragraph" (the essay was submitted before the exam). While most student did well in this question, still I found one or two who wrote a completely different thing from their essay, one or two who left it blank or were only able to remember the title, and some who did not 'answer' it correctly.

If you happen to be that type of student, I just want to say "Plis deh...!"

How valuable are social networks?

An interesting article in the Economist on the Facebook phenomenon. It mainly discussed from the business perspective. But it also has an interesting side-question worth elaborating: what are the returns on social networks? Forget the what or how much for a while, are the returns increasing, decreasing or constant?

From one perspective, investment in social networks seem to have increasing returns. Think about your friends as possible sources of information (on job, prospective boy/girlfriend, where to buy new car, new technology or other cool stuffs). Or sources of 'ideas' (how to solve the Hamiltonian homework, who to make fun in the column in the campus billboard). Then the benefit of having ten friends is more than twice of having five.

If this is the case, then companies or any other organizations that base their activities on social networks will have an ever-increasing values if their customers' networks are expanding. Think about cellphone companies. It worth having a cellphone if I have a certain number of people in my networks (the one I will be very likely to call). That's why we see a lot of promotion package like member-get-member, family plan, group package, etc.

The article also wrote the implications for social network websites like Facebook, Friendster, Flickr and so on. But here's the catch, as mentioned in the article:

But unlike other networks, social networks lose value once they go beyond a certain size. “The value of a social network is defined not only by who's on it, but by who's excluded,” says Paul Saffo, a Silicon Valley forecaster. Despite their name, therefore, they do not benefit from the network effect. Already, social networks such as “aSmallWorld”, an exclusive site for the rich and famous, are proliferating. Such networks recognise that people want to hobnob with a chosen few, not to be spammed by random friend-requests.

So which one is it; do social networks have increasing or decreasing returns? To be honest, I don't know the answer. As usual, when you can't give a firm answer, in the conclusion you'd say "this should lead to further studies."

Nevertheless, an old paper by sociologist Mark Granovetter provides a valuable direction. We need to distinguish between strong ties and weak ties. The paper explained the power of weak or impersonal ties -- in which an individual friend may become a hub to other people outside of our network.

So, the optimal strategy may not be investing in as many friends, but in a limited number of friends, who individually have other friends in their own networks.

Economics is not a Rocket Science

This is from an interesting book, with an unimpressive title: The Knowledge and The Wealth of Nations: A Story of Economic Discovery, page 169

(Lucas) sought a 1957 book by Richard Bellman, Dynamic Programming. Bellman was a mathematician working at RAND Corporation, quite literally a rocket scientist. He had invented a set of techniques designed to optimize decisions in which long chains of choices had to be made amid changing circumstances -if for example, you wanted to fire a missile into the upper atmosphere and hit a target halfway around the globe, or even travel to the moon".

and

"Lucas hoped the same methods could also be applied equally to calculate a point at which to spend or save, to decide when to draw down inventory, or to switch from stocks to bonds. Anything that required a formal statement of the links between present and future was a candidate be improved by rocket science".

Now I know why I had so much trouble preparing for Macro mid exam. (grin)

OK, let's just play jazz.

Entering the third year

Ah, I can't believe I'm still with this café after almost three years. I was recruited by them hosts on December 18, 2005. There was a quick interview. I was asked if I could manage the logistics of the café and I said I could do not only that but I also chose good music. I only raised one question, why the name - here's what they told me. So there I was: managing and setting the playlist, while they were fixing econ drinks. Until I figured, hey I could do my own econ, too.

Café Salemba is entering its third year tomorrow. Many things have happened in the foregoing two years. The hosts now, except Rizal, are all in Indonesia. Rizal -- once a guest blogger then joined as a permanent host -- is now in Virginia, sipping coffee a lot at Cafe Hayek run by his boss there (of course Marginal Revolution and EconLog are also in the neighborhood). Ape (or sometimes he prefers A.p), is now wearing two hats: one when he is in Tanah Abang neighborhood, another in BEJ area, where he enjoins Sjamsu who in turns also visits Gambir frequently -- not the station, mind you. Ujang is in Jogjakarta now doing a big research project. Aco is still in Salemba (he now moonlights at EPI, by the way, with Dede Basri). Oh yes, we so far have four guest bloggers: MT, Puspa, Tirta, dHani. The first two are now in U.S., the third is in Australia, and dHani is in Jakarta.

On behalf of the Café I would like to thank all you visitors, commenters, critics, and competitors. We have learned a lot from interacting with you and we sure hope more to come. Should you have any suggestion to improve the café please let us know. For any inconvenience to date, we apologize.

In the meantime, enjoy Black Eyed Peas and Beyoncé. They are way more fun than J. Stiglitz or M. Yunus, I guarantee you.

Markets fail. Use markets.

That is masonomics.

Rizal is now there, by the way.

Where to go, Alice?

Aco loves this Keynes' quote:

When the facts change, I change my mind. What do you do, sir?

While we all know that we should avoid a policy without empirical fact, oftentimes the empirical findings at your disposal is at best inconclusive. Take for example the issue of death penalty's deterrence impact (HT: Andrew Leigh), or the economic impact of global warming.What would you do?

AP likes Alice and Cheshire Cat's dialogue:

"Would you tell me, please, which way I ought to go from here?"
"That depends a good deal on where you want to get to," said the Cat.

Which way, Mr Cat?

Che and On Being at Twenty-Something

You may have ever heard this variation of Guisot/ Clemencau/ Churchill's quote:

Not to be a socialist at twenty is proof of want of heart; to be one at thirty is proof of want of head.

The quote comes to mind when I read the leader of this week edition of The Economist denouncing one of well known socialist's icons, Ernesto "Che" Guevara, as a fighter against freedom and democracy.

Well,..err.., perhaps, uhm...I don't know (scratching my head).

But I'll take a liberty to say that some of the baristas here were bunch of socialists (or at least had a flavor of it) when we were twenty-something undergrad students. And I can testify that Che, along with Iwan Fals and sometimes Ahmad Wahib and Soe Hok Gie (before the movie), somehow sent (some) students to go down to the street those days. It was a symbol of courage against tyranny and social injustice.

Such a powerful symbol that it tells you why even today you can still see Che's picture from Havana to London's Portobello to PSS Sleman fan's T shirt. While on the other hand, as Alex Tabarrok once wrote, no one goes to the barricades (and die, my word) for efficiency.

Who cares about efficiency at twenty, anyway?

Pacaran is sunk cost

I said in the last post that the guy who was left by his girlfriend after what he did (he said he had done everything -- presumably good things in his view) was just not good enough for the girl. Well, if I were my student, I would have given that answer a B-minus. A better answer is: because the costs incurred during dating or pacaran are sunk.

Again, dating is a two-to-tango game. So, when the guy said he had given everything, chances are she had given everything, too. When they both were giving each other, they incurred both costs and benefits -- of which I do not want to dwell into details.

In the story (Samuel Mulia, my apologies, I'm using your article here again -- by the way, keep up good writing), one person is left out: the girl. The decision that is relevant to see why "she left me after all what I had done" is the girl's decision to leave him, not the guy's fate to be left alone. That is, what matters is what probably triggered the girl to leave. So let's focus on her.

In the period of dating, the girl incurred costs: makeups, fancy skirts, perfumes, even the effort to walk and talk "like a lady". All this she did to attract and later, to keep that lucky guy with her. Right before she did every single item above, she had an expectation: All these I would do because I expect him to give me this or that, in return. But once the activities were done (e.g. once the fancy skirt was bought), they all became sunk costs: they were not recoverable (well, she might go to second hand market selling the used skirt, but hey, she is a lady).

Fast forward. There was a quarrel between the two lovebirds. The girl was now at the margin of decision: leave or stay (or, if you don't like these terms, use: leave him or keep him). What would you think she had in mind, as factors affecting her decision? Yes the costs and benefits of leaving him. She would leave him if the resulting benefits (relief, chances to get a new guy, etc) exceeded the costs (effort to make him go and to make up good, convincing story to friends, etc). But the costs incurred during pacaran were not relevant anymore.

(If this is not convincing, try picture you are about to go mudik. You are thinking of driving your car or simply take the train. The amount of money you used when you bought the car is not relevant to your decision).

So, ladies, next time a jerk begs you to not leave him, using "Please don't go, Honey. Remember what I have given you all this time?" Tell him: "Baby, it's all sunk. Now shut up".

Searching for the best

You dated one girl back then. Then you two realized it wouldn't work. Now you're with someone else. This someone else is surely better for you than the former one -- at least, for the time being. Why?

Samuel Mulia's column in Kompas last Sunday was interesting. And explainable. He was shocked as one of his friends who had been with different dates told him that he (OK, I'm assuming gender here and onward; chances are, I'm simply wrong) was "never in this situation, i.e. never in love as much as this". And Samuel was puzzled: "Does that mean he didn't love the previous dates much enough?" Samuel sounded sorry for them: "Too bad, maybe those former dates falsely thought they were special, the chosen ones".

What you do now must be your best. At least for now. Otherwise you would not do it. Similarly, whom you are with now is your best pick. Otherwise you wouldn't have picked her. But why the change of hearts? Because you moved from your 'local neighborhood' -- far enough to find that you had been in a situation inferior to the current, new equilibrium. But why in some cases a guy comes back to the first one, after dating several others? Because that First One, as it turns out, is the guy's global optimum. Meaning, as far as he can search, she is simply his best.

So to Samuel's disappointment, the answer to his big puzzle is, yes. What his friend told him is not surprising at all.

But it always takes two to tango, you ask. Of course, your spouse or date is doing exactly the same to you, sorry.

In Samuel's story the telling guy was left by the girlfriend. He said: "I've given everything to her..." but "why did she just leave me like that?". The answer should be simple: He's just not good enough for her. For the time being.

Fighting piracy with ads and getting 'free' CDs...

I have a proposal. Put ads in music or movie CDs/DVDs, then give them away for free. That way, privacy rate will go down to zero.

I was having coffee and reading one of those free magazines you find in coffee shops or cafe. I noticed that such magazines are getting better and better. Yet, they were free. So it must be the advertisements that covered all the costs plus some margin (maybe handsome, too) for the editorial and production staff.

After the coffee, I went to the CD store, bought my new New York Voices (liked it, but I guess it's the Manager's posting area). Then suddenly I thought: hey, why don't they run music business the free-mag way?

I mean, think about it. If you can get some company advertise in your album and for that ask it to pay all your dues plus some profits, your label doesn't have to ... sell the CDs. Just distribute them for free. Yes, just like the cool free-mags. And the best part is, because the selling price is zero, nobody will have the incentive to pirate it.

The only problem, maybe, is that music (or movie) CDs (or DVDs) are meant to be long lasting. Who wants to listen to an ad over and over again? (Yes, if you are in my age cohort and lived in Indonesia, you would remember that back in those 80s, we had LCLR - Lomba Cipta Lagu Remaja or Song Writing Competition - sponsored by a famous radio station, Prambors. Then they produced the cassette. Then, in the middle of your listening to the songs, there were a couple of ads (if I remember correctly, one was Teh Botol). But the cassettes were best sellers).

I know this is just a wild idea (I'm ready for your calling it stupid). So help me improve it. So we can also do this maybe to books and softwares...

Boring Econ 101 No More

I won't go to the college where the lecturers say that they don't know his/her subject any better than students. I give them money tuition and my time in exchange for them telling me what I don't know. That is why I don't get anything called the new way of (college) teaching method assuming basic premise abovementioned, in which students do lots of group work, and teacher acts at the margin as watchdog, err..., no, facilitator.

The problem lies elsewhere: many teachers fail to make lecture interesting. Putting aside the probability that they don't know the subject well nor catch up with the latest development in the field, you can suspect that it is because: first, they don't acquire the important communication skill. Or, second, they too much rely on, unfortunately, overwhelming textbooks unfriendly to current MTV generation.

Until not so long ago, when Freakonomics hit the market, economics professors (and profession) often fell into these problems. As a result, Econ 101 is no fun for many students, hence is of small use.

So what should teacher do to help students? I don't opt to drastically new teaching method. Just be accessible when speaking to those young minds. Try to read not only academic journals, but also recent (good) pop econ book -and blogs too. As a note, good pop econ books (Freakonomics, Undercover Economist, Discover Your Inner Economist, to name the few) do not contain (stupid) conspiracy theory.

The latest of such book aimed to aspiring Econ 101 teachers is coming from Robert H. Frank, The Economic Naturalist (HT: Justin Wolfers). Here's the appetizer, intro chapter. And if your connection is fast enough, check this funny, and bit corny, MTV Cribs folly of this Cornell's, Ben Bernanke's buddy, Econ professor.

Our right? OUR right?

I am looking -- no, staring, at this reader's letter to Tempo magazine. It is about cheap laptop supply for developing countries. He basically, literally, says, "As citizens of developing countries, we have the right to enjoy such services... Developed countries are obliged to provide easy facilities to global citizens, especially those in the third world".

D'oh!

Update: Oh, it's going to be Linux-based. I guess the letter writer will send another this-is-my-right-that-is-your-obligation letter saying that it should come with a free training in Linux.

(Another) Natural Resource Curse

Dede of Ekonomi dan Politik di Indonesia (in Bahasa Indonesia) raised an interesting issue on the paradox between natural resource richness and low economic growth --or more technically called natural resource curse. He basically said that it is actually no wonder that countries like Indonesia, with its abundant natural resource, don't perform remarkably well in comparison to countries with limited resource for two reasons: First, the Dutch disease, real exchange rate appreciation makes producing tradable goods less attractive (Sachs and Warner, 1995). Second, weak institution as natural resources rich countries are more prone to corruption (Mehlum, Moene, Torvik, 2006).

Suppose, then, that we can get rid of those problems, are we now free from the spell? Alas, not that fast.

Hausmann and Klinger of Harvard (2007), --hat tip to undercover economist Tim Harford--, introduced the idea of economic space of production network (the proximity amongst products). In that space they spotted densed (manufacturing) and sparsed area (natural resource based products). Look at the paper for more detail of products.

And yes, they found that country with good economic performance tend to export products in densed (closely related products) space. Why? The flexiblity of country's acummulated capabilities to be redeployed across products, hence greater gain from trade.

It leads you to a very interesting situation: What to produce, and specialize in, matters and relying on exporting natural resource based products might be inherently a disadvantage. But it is costly for natural resource rich countries to redeploy production capabilties and to move into the centre of dynamic world production network.

At home, it also intuitively tells why after the crisis that brought back Indonesian revealed competitive comparative advantage to more natural resource based products, the country's export performance remains weak. Probably, we are now no longer that close to the most dynamic locus on global production network.