The Ethnography of Chicago Economists

In 1973, Axel Leijonhufvud of UCLA wrote a satire, self-mocking, nonetheless quite accurate, paper on the anthropology of Econ tribe (in pdf here) published in Western Economic Journal. It's a useful paper, should you fail to understand contemporary economists and economics as one among so many odd creatures in the world.

And for more recent work, allow me to suggest you a book on even more controversial economists' sub ethnic: The Chicago School, How The University of Chicago Assembled The Thinkers Who Revolutionized Economics and Business.

I don't think the author, Johan Van Overtveldt, wrote that as one, but I like to read it as a smooth excellent ethnography on otherwise very boring stuff of this, for many, source of contempt, and for many others, admiration.

Like any ethnography work, it has its several usual features like the description on power structure, hierarchy, recruitment, rituals, shared values and ideas, and conflicts. Overtveldt is a well informed author, and he separates his work, yet excellently knits, the several key ideas of Chicago school from price theory, monetarism, economics of regulation, law and economics, to finance. Unlike many less excellent social science writing, you don't find yourself lose the broader picture whenever you read some details somewhere in the book.

And it's not merely about Milton Friedman, George Stigler, Gary Becker, or Eugene Fama, but also many less influential figures that shaped the school the way it is now. Also, the most interesting part to me is the role of dissenters, people with either Keynesian tendency or less faith in market mechanism like the economists at Cowles Commision, the socialist Oskar Lange, and to some extent Ronald Coase, Frederik Hayek, and later Richard Thaler.

It tells one important lesson that even a most solid bastion of neoclassical economics needs their critics to be integral part of their citadel (to make it even stronger, I should say). Although most of dissenters did not survive, their most academically productive period was usually when they were in Chicago under its infamous intimidating traditional institutions like workshops and seminars there.

It's a real page turner but, and this is probably the turn-off for non economics specialists, you need to at least broadly understand different schools of thought on the issues above. I think undergrads' Micro and Macro Theory 1 (take Aco's and Ape's classes if you are at FEUI) should serve you well to enjoy this one of the best books I've read in 2008.

Theorizing Chillies

I have never fancied eating chillies for the reason that they merely give you a false sensation. How could you know the real taste of food, if you keep pouring the chillies into it? I even have theory: as chillies only disguise the richness and variety of food's taste, one will consume more of them only when they need to do so --for instance, when I am short of cash and can not afford variety of food like in those college years.

Scientifically, as read in Xmas Specials section in The Economist, my theory seems to be confirmed:

The reason may be that capsaicin excites the trigeminal nerve, increasing the body’s receptiveness to the flavour of other foods. That is not just good news for gourmets. It is a useful feature in poor countries where the diet might otherwise be unbearably bland and stodgy.

But I need more convincing empirical finding, and maybe household survey data could help by showing the relationship between chillies consumption, or purchase, to total income --presumably after controlling the price.

Yet, even if I am right. How could you tell why, as the article suggests, that, thanks to globalization, people in developed countries start to embrace chillies?

Then perhaps, I need to resort a second speculation: The food in developed countries are even more bland than in developing countries. So bland that it cancels out the income effect.

Hajj pilgrim and randomized experiments

Randomized experiments seems to keep moving the frontier. From micro credit to deworming to teacher's absenteeism to corruption. Recently, a study on the impact of hajj pilgrim and tolerance behavior was conducted using the method, by Kennedy School's Ashim Khwaja and his colleagues.

This is how they did the randomization (in which I am interested more):

For the study, three economists interviewed 1,600 Pakistanis, half of whom had been on the hajj in 2006 and half of whom had applied for visas to go but were rejected. Respondents answered 200 questions in face-to-face interviews that lasted hours. The interviews took place five to eight months after the pilgrims came home.

And this is the result:

Muslims who undertake the hajj "return with more positive views towards people from other countries," are more likely to say "that people of different religions are equal," and are twice as likely as other religious Muslims to condemn Osama bin Laden, the study found.

Looks like economists can now have job opportunities in the Ministry of Religion...

Dear Kate: Why don't you tell us everything we want to know?

Dear Kate,

I was chatting with Dumbfounded Psychologist @ Oz the other day, casually trying to reveal the secret behind beautiful girls, where the best place to find them, and other great mysteries of life, when we stumbled upon two curious facts about economists (it goes without saying that we like gossiping about you guys - of course, we see you guys as our evil twins):

1. Economists schmooze a lot, like celebrities (our metric is straightforward: There are more facebook profiles of economists than other academics).
2. While you can wittily explain why doughnuts are generally safe, how to divide tasks among baby sitters, and why public toilet lids are dirty, you have (almost) nothing to say about things that pertain to the recent credit and financial turmoil (except some snippets from the media/blogs posts) -- the latter of which we thought is (or should be?) their main cup of tea; where are questions such as what is money?, how do credits create money?, can we have an economy without credits?, what does economic growth really mean?, what is the relationship between production  and financial economics?, what is the fundamental source of financial instability?, are asset-price bubbles real?, why do we have (need) inflation? how does a bank run happen?, is globalization always good, how about the globalization of risks? why do we borrow, spend and save? and what is the underlying belief/morality for these three actions?

Please tell us what's going on?

Looking forward to some economic insights, as always,
Belligerent Sociologist @ NYC (also on behalf of Dumbfounded @ Oz who is happily holidaying)




Dear Belligerent Sociologist @ NYC,

The answer is easy. We don't know.

Thanks,

Kate

Act quickly... no, wait...

I am confused. First, they said that the government needs to act quickly to anticipate the global crisis. They even criticized the government for being slow and lacking of strategic actions. But now, they are the ones who delayed the actions by rejecting the Financial Sector Safety Net bill. Oh wait. No, they didn't reject it. They just didn't accept it, and asked the government to submit a new draft. So, it means the current government decree is still valid. Now I am really confused.

One of the reasons for the rejection, as cited by various press reports, was "the Law will give so much power for the Finance Minister and Central Bank governor to deal with the crisis." Wait, isn't that what they are supposed to do -- dealing with the crisis? The opponents also rejected the idea that the Finance Minister is the authority to announce that the country is in a crisis (hence activating the Law). "Like war, it should be announced by the president." Come on...

Honestly, I don't have a clear information on what's going on behind the curtain. It hope it just a matter of lack of communication between the government and the parliament (well, the definition of 'communication' also matter). I hope it's not because it's getting closer to the election and politicians try to capitalize the crisis by... preventing the government from doing well.

Update: Aco's post on the issue in exegesis.

Dear Kate: Do you eat donut?

Dear Kate,

I'm a donut lover. Recently I found all these emails telling us not to eat donut made by some favorite donut makers. The reason is, they use preservatives and hence bad for your health. I've been an addict of one particular brand. It's a chain and very popular. Whenever I go there I have to wait in a long line before I get my donut, but trust me, the donut is worth the queue. Now these emails make me rather worried. I know you're no expert on health and all that, but what do you think?

Thanks,

Donutlover @ Jakarta



Dear Donutlover,

As you said, I don't know anything about health, nutrition, etc. My main tool is economics and here is my take. First, a big brandname with reasonable competition would be very careful so as not to disappoint its patrons. In the case of food and beverages, this includes especially issues related to health. Second, adding a material or ingredient in production means more cost. So if one producer can make a tasty donut with no or less preservative, the second would be foolish to produce equally tasty donut with or more preservative. Third, you mentioned that you always have to stand in line to get your donut. That's a good sign. It means they are more likely to come up with freshly made donuts. In other words, their donuts don't need much time between oven and your mouth. Why need (more) preservatives if that is the case? Four, from what I heard, every donut has preservative. It's a matter of how much. But then, see the preceding three points. Finally, let me tell you that everything entails risk. But avoiding risk completely means you have to stop consuming everything.

So, if I were you, I would ignore those emails. Enjoy your donut. I'll join you next time.

Best,

Kate

So now it's shoe? Whatever happened to the pen?

This whole thing about a desperate journalist throwing his shoes at Dubbya, I don't get it. No doubt that embarrassing incident will become the "scene of the year". It will appear in every newspaper caleidoscopical cartoons, I bet. But still, why is that guy suddenly a hero? He even missed the target!

I thought the press people took pride in "fighting with pen". Has it changed now to "fight with shoes"? My hypothesis is, that shoe-throwing journalist guy is a lousy one. Because he can not use his pen -- or mouth. He might be better as a dartboard player (ah wait, not really: he missed!), but not as a respectable journalist.

Hey, don't throw me shoes. It's not that I like Bush. I hate him, too. But be civil: "shoot" him! With a pen, in your paper, that is.

Addendum: As you might have expected, some local journalists are excited. Budiarto Shambazy praises the shoe thrower for "proving that shoe is more effective than pen" (can you believe it? That is said by a senior journalist). While Syirikit Syah, a media watch activist, writes that she wishes the shoe-thrower health and freedom (The Jakarta Post, 20/12/2008), even though he, the thrower, expressed his opinion "violently and unprofessionally". Welcome to shoe journalism!

On New Year's Resolutions (by Tirta)

Hi there. As our favorite psychologist Tirta reminds us, we're approaching the end of the year again. We don't like being older. But as you can't deny gravity or greed, time is unbeatable. And we like to fool ourselves by sweet resolutions, only to fail them very quickly. The dumbfounded psychologist offers his explanation. Enjoy! -- Kate

ps. Sorry the fonts were too small. I have fixed 'em now.
pps. Forgot to tell you. It took me awhile before realizing that the smart Dumbfounded Psychologist @ Australia is our own guest blogger, Tirta. Of course he didn't tell me that. (Well to tell you the truth, I took one special course in Langley long time ago. I can read patterns in writings and then identify the writer with 98% accuracy - so far). So my apologies, Tirta; Peter Parker might have to order another spidey costume?

On New Year's Resolutions
by Tirta

Dear Cafe Salemba goers,

It's that time of the year again, when we all stop, sit, and reflect on what we have done in the past twelve months, and what we would like to do in the upcoming twelve. Yes, it's time for New Year's resolutions, time for all sorts of admirable pacts between our present and future selves, from reading more books to smoking less.

Yet it's almost a truism that only about a third of these resolutions will be eventually fulfilled, as we will fail another third, and the last third...well, we won't even remember what the last third are. And then it comes full circle, when in twelve months time, we will sketch another list of things to commit to in the year to come, and again fail two-third of them. And so it goes, annually.

For any psychologist (including a dumbfounded one, like me), this has to be one of the most intriguing habits of our species. So in my last visit to the cafe this year, I'm going to sip some regular flat white, as usual, and chat a little bit about why we're not that good when dealing with annual resolutions. I'll also share some ideas that might be useful to overcome this problem.

Here's why New Year's resolutions are awfully hard to stick to. When we make commitments, we simulate what lies ahead. We travel mentally into the future, and imagine ourselves doing what we think we should do. We see ourselves sitting in a desk, diligently reading serious books; we see ourselves in a cafe, sipping coffee and having good conversations sans cigarette. All too easy for creatures as smart as us.

The simplicity of this simulation, however, is deceptive. The brain, because it was naturally built in a kludged manner over millions of years, is not an ideal tool for future peeking purposes. It can never fill in all the important details, such as the gossip magazines that will be scattered around our desk, and the smoking friends who will seem to enjoy themselves more than we do. And as they always say: The devil is in the details. All of a sudden there is a profound change in the equation: Books appear boring and cigarette seems irresistible -- and there you have it: We find ourselves back to magazines and nicotine again, before January ends.

Now multiply this simple example by some orders of magnitude, and you have a psychological explanation why New Year's resolutions don't work. So if you, in a few weeks time, find yourself not making it to the fourth item on your resolution list, you can at least understand why: It's because your brain is an imperfect biological organ that lives primarily in the present¹, not an ideal logical machine in some atemporal planet.

Okay. Now the antidotes. I have two. One psychological, the other sociological. Wait...make it three (I'm pretty sure I have to have an economic one, or else Kate and the barristas will kick me out of this place).

First the psychological. In one set of randomised experiments, my colleague Roy Baumeister found that self-control tasks depleted people of blood sugar more than other, comparable tasks; in another set of experiments, he showed that people who consumed blood sugar during the experiment performed better in a number of self-control tasks relative to the control group². Blood sugar, he then went on theorising, is the fuel of our self-control engine. Whenever we need to exercise self-control to commit ourselves to things we wouldn't otherwise do, like faithfully adhering to New Year's resolutions, we need to refill our blood sugar. So next year, make sure you have enough blood sugar before opening that first chapter of the book, or before going out with your smoker friends.

The sociological solution is a non-brainer: Socialise with the right crowd. Find yourselves, as often as possible, among bookworms and non-smokers. Recent research by the sociologist Nicholas Christakis has shown how smoking, obesity, and even happiness may spread from person to person in a dynamic social network ³. Unless you prefer to live your life in an atomic fashion, hang out with those who are more likely to help you with your set of resolutions. No, it's not manipulating others for your selfish benefit, it's applying the insights from the new science of network⁴.

Finally, the favourite solution of your manager and hosts. Some dismal scientists have recently pursued the time-honoured idea that better commitments requires better financial incentives. Last year, Jordan Golberg, Dean Karlan, and Ian Ayres set up a virtual company called stickk.com, where you can put some money in and ask the company to give it away to your most hated charity every time you fail to finish that first chapter of the book or find yourselves holding a burning cigarette. You will commit, their reasoning goes, when there is something significant (read: money) at stake.

That's it folks. I'm off for a holiday now.

Oh, one last thing before I go. To Kate, Aco, Ujang, Sjamsu, Ape, and Rizal: Thanks for being generous to psychology over the years; I just noticed that among the tags on the right, psychology (14) fares rather well, on a par with capitalism, competition, econ 101, and household economics, and above corruption (8), financial market (11), labor economics (13), macroeconomics (13), poverty (13), and property rights (8). Well done shrinks!

Happy New Year 2009,
Your Dumbfounded Psychologist @ Down Under

¹ Some of you might raise your eyebrows here and wonder: What about memory? Surely that's a sign that the brain also lives in the past? Well no, that is not true. Memories, according to Psych 101, are never recalled, they are reconstructed. One of the most groundbreaking neuroscience findings this year is that brain cells that fired when one experienced an event for the first time fire again whenever one is remembering that event -- which indicates that remembering, in fact, is re-experiencing.
² http://www.psy.fsu.edu/~baumeistertice/gailliotetal2006.doc
³ http://christakis.med.harvard.edu/
⁴ If you don't believe me, say hi to the Belligerent Sociologist @ New York. He would be delighted to tell you all you need to know about this new science.

Is more budget for education always a good idea?

Is mandating the government to allocate at least 20% of its budget for education a good idea? I don't know. But surely it has a downside: it creates a distorted incentive, especially when the budget for education has never been that high. People care more on how to spend the budget and less on making priorities and finding what really works.

This is an example of the distorted incentive at work: creating elementary schools with "international standard." Is it the priority for now? For me, some other problems need higher priorities. First, quantity and maintenance of school buildings, especially junior secondary schools in remote areas. For every 7 elementary schools, there is only one junior secondary school, so achieving a universal enrollment rate for children aged12-15 is more difficult. Don't get me start with the physical quality of existing schools.

Second, lower cost of schooling; not just tuition fees but also expenses for books and uniforms.

Third, teacher management. Pupil-to-teacher ratio in Indonesia is about 14 to 1, that's quite low. But the average class size is 37 students. This shows that we have oversupply of teacher with short working hours. Geographical distribution of teacher is also another issue. Sixty-five percent of all schools in Indonesia are overstaffed. Yet we often here the stories of a single teacher taking care of all students in a remote school.

Then you can add the quality of teacher, low perceived return on education, and other issues that are in higher list of priorities.

Of course, having more schools with international standard is good. But, for Rp1 billion allocated subsidy for three years to each school - with only limited number of students can be admitted - surely there are better ways to spend public budget. And, should such project be a public-sector one? The private sector can fill the gap for the international-level schools (and they have done it), while public budget will be better used to improve access.

Update: a friend of mine wrote this op-ed about another idea to use education budget to improve PC-per-student ratio. Again, the idea is good. But when you think you have tons of money in your pocket, you care less on how to spend it efficiently.

A blueberry conversation...

A late night discussion at a coffee shop in New York:

Jeremy: From my observations, sometimes it's better off not knowing, and other times there's no reason to be found.

Elizabeth: Everything has a reason.

Jeremy: Hmm. It's like these pies and cakes. At the end of every night, the cheesecake and the apple pie are always completely gone. The peach cobbler and the chocolate mousse cake are nearly finished... but there's always a whole blueberry pie left untouched.

Elizabeth: So what's wrong with the blueberry pie?

Jeremy: There's nothing wrong with the blueberry pie. Just... people make other choices. You can't blame the blueberry pie, just... no one wants it.

That was from Wong Kar Wai's "My Blueberry Nights," starring Jude Law as Jeremy, the cafe manager, and Norah Jones as Elizabeth. So yes, don't blame the blueberry pie. The market just don't clear, that's it...

The question is, "why do you keep serving it?" Lizzie asked Jeremy, at the end of the movie. "In case you come back..." answered Jeremy.

Empirical and Theoretical Flaws Questions

Based on this op-ed,

On monetary policy, the government confines themselves into a free capital mobility regime. Since long time ago Rupiah did not act as the master in his own home. The government does not trust in the strength of own currency. The US dollar is allowed to become price benchmark in the country. The illusion is created as if Indonesia is a dollar haven and market psychology is formed to save the dollar as if it is precious jewelry. In other countries, (however), all public transaction are set in local currency.

First off, the empirical questions: Do we now have to pay our lontong sayur with US dollar money only? Are our Pegawai Negeri now paid in US dollar? And, for the other country's example, if China wants to buy Treasury bills from the US, --a public transaction, yes?--can they just hand in the renminbi to the US Treasury, and the latter will happily accept it?

Suggested answers: No, no, and no.

Does it means that the exchange rate, not only against US dollar, is not important? No. It determines our balance of payment, our window to the world economy.

Second, the theoretical one. If you, a sane government, adopt a free capital mobility regime, you must have known and assumed that the interest rates ups and downs, be it domestic or international rate, hence capital inflow/outflow, do not lead to a drastic volatility of your exchange rate --hence trade.

In other words, you trust your currency to stay more or less within a reasonable span.

How do you then relate the first and third sentence of above passage?

Suggested answer: .............(don't ask me, I can't pretend to know the answer, too)

Feeling pinkish

I'm feeling feminine. I'm in Surabaya now and they gave me one of these "executive ladies rooms with feminine services and facilities". I don't know why they did that. As far as I remember I don't look like a lady. As I enter the room, the TV is on with the hotel info slides rolling and Diana Krall singing "One of Those Things" repeatedly in the background. Then there is this pink pair of pillows. I'm a little disoriented. On the one hand I feel like protesting: What now, as if the world is not enough with "ladies nite" at discos, "ladies first" at elevators, or "ladies parking only" at malls? On the other hand, I think it's cute.

What's the economics of this? Ah, never mind. I'm enjoying this soft scent from the nice potpourri...

Dear Kate: Why blogging economists?

Dear Kate,

It just occurred to me this morning that cafesalemba is quite a productive blog, which indicates that you guys must be spending a substantial amount of time hanging around in the cafe. But then I thought about two of your most beloved econ 101 ideas: incentive and opportunity cost, and couldn't figure out how to rationally reconcile these lessons with your behaviors of -- apart from sipping coffee, of course -- writing frequent posts and promptly responding to comments. You see, economists like to say that voting, for example, is irrational because the incentive is far smaller compared to the cost of registering and casting the ballot, and that one can make better use of their time instead. Now I take this voting example to heart, and wonder how it applies to your daily cafe behaviors. Given that the benefit of post writing and comment responding in this blog is less clear than the many alternative usage of your time (benefiting readers and commenters can never be guaranteed, and gauging the impact of your blog is close to impossible), I think I have to ask this question: Why blogging?

In anticipation of some economic enlightenment,
Dumbfounded Psychologist @ Australia

PS: Please don't say that blogging is a form of expression, it's my kind of explanation.


Dear Dumbfounded Psychologist @ Australia,

I can't speak for the baristas, but I'll do for myself. Here goes. I blog when doing it gives me more pleasure than discomfort. Right now I have exams coming up and couple of papers due next week. To your view, I probably have to be preparing myself for the exams or finishing the papers now. But I don't feel like doing either of them. Instead, I am answering your question. Because for some reason, I feel happier doing that. This is another way of saying that the benefit is higher than the cost, to me. Now. The benefit can take many forms: maybe because I like you, maybe because I want to show up (and it gives me pleasure), or simply because I'm in the mood for blogging. Whatever it is, it makes me, again happier than the alternatives. The cost of it is, yes, the time I am spending not for studying (or writing paper, whichever likelier to give me better grade). But the fact that I'm posting a blog entry now tells you that I value the benefit more than the cost. When will I stop? When the additional cost match the additional benefit. That is, when the guilt from not studying (again, or writing, whichever serves as the second best to blogging now) has reached the additional satisfaction of blogging. That is, if I add one more sentence, I don't feel happy anymore. And that's about [looking at the clock]... now.

So see you next time,

Kate

Rethinking Yunus

I used to think that M. Yunus' work on Grameen Bank tells that, contrary to common belief, lending to the poor outside regular banking system can be profitable, because they are equally good, if not better, in repaying their debts than the non-poor.

But I don't understand why, when his idea has been seriously taken by people that really want to make profit by lending to small and poor investors, the microfinance, he was fumed and pointed them as moneylenders, the bad guys he wants to get rid of.

I read this in Tim Harford's article (HT: Marginal Revolution) that summarizes the debate on whether it is appropriate to actually make money and adopts profit maximizing value in microfinance, or should it be left as non profit motive. This, I think, an important topics and we'd be in a better situation should this be read and discussed by anyone seriously involved in microfinance frenzy in the country.

Tim wrote:

There is nothing intrinsically sinful about pawnbroking or intrinsically virtuous about microloans: what matters is the effect on the clients. And to our discredit, we don't really know what that effect is. There have been only two serious cost-benefit analyses - and they've produced a split decision as to whether, given the subsidies involved, microfinance delivered value for donor dollars.

Dean Karlan, a microfinance economist at Yale, is frustrated by this lack of serious research into what works. He also thinks Yunus's talk of "the moneylender's thinking" is unhelpful. "If you're trying to make the world a better place but you're not, that's bad. If you're trying to make profits and don't care about people, but make them better off anyway, that's good," he says.

Thus we don't really know, empirically, whether microfinance initiatives helps the poor. Which brings me into a question to friends advocating microfinance that might read this posting: do we have empirical evidence on the impact of microfinance to, say, poverty in Indonesia?

Also it is interesting to discuss two buzzwords that oftentimes brought in to argue the superiority of Grameen-like microfinance: the peer control, or group liability, and the role of women as debtor, because:

Already, solidly held beliefs about microfinance have been shaken. The "group liability" system, in which a group of borrowers guarantee one another's loans, is still supposed by many to be the secret behind Grameen Bank's low default rates. But a randomised trial in the Philippines conducted by Karlan and a World Bank economist, Xavier Gine, found that group liability was discouraging new customers without improving repayment rates. Grameen itself quietly dropped group liability some time ago.

Another sacred cow of microfinance is that women make best use of the money - the Grameen Bank says 97 per cent of its borrowers are women. But another randomised trial, conducted in Sri Lanka by a team of researchers including David McKenzie of the World Bank, found that male borrowers seemed to make a far higher return on their capital. As with the ZaFinCo study, it's just one experiment in one country.

Anyone in the business or aware of the issue, please feel free to jump in and join the fray.

Is Our Middle Class The Grabbing Hands, Too?

So I find that at municipal level, the larger size of middle class, those who live in urban area or are at least ever educated in high-school, contrary to the idea that they are the strong pressure group in favor to clean governance, is associated with lower, yes, lower bureaucracy's governance quality.

I decided to call Philips, my favorite political scientist (and avid LP collector), to consult this result. After hearing my brief explanation, he just laughed and said, " they are probably the bad guys themselves".

Maybe so. Any other idea?

Cafe Salemba goes mobile

Dear you all,

We officially go mobile. If you want to read Café Salemba on your mobile phone, go to http://cafesalemba.mofuse.mobi

Hope you like it.

Kate

Dear Kate: Which roll?

Dear Kate,

I'm a chief janitor at an office building. In my attempt to cut costs, I recently decided to change toilet paper from the average, two-ply rolls to the thinner, one-ply rolls. Of course the latter is cheaper -- it's only half the price of the previous type! But why now, as I'm balancing my book, I find the costs end up pretty much the same?

Thanks,
Jo the Janitor @ Manggarai
p/s Say hi to Dumbfounded @ Oz



Dear Jo the Janitor @ Manggarai,

Because people are used to the "average, two-ply roll". When you replace it with the thinner one, they simply take more (longer, for that matter), fold it, and wipe their a**. On average, your boys will have to supply rolls twice as frequently to the toilets. So, if you think you can save money by changing the rolls that way, think again. Here's my suggestion. Find another type, still two-ply roll, but rougher (and hence cheaper). Your toilet patrons will think twice to overuse it or they will hurt their a**.

Thanks,
Kate
p/s Dumbfounded @ Oz might not like this toilet talk.

Two History Books

I am into history now. Over the last month, I read about Maghribi traders and Genoese podestas, and listened to my classmates term paper's proposal on Texan cowboys' rule on cow stealing and Spanish Moslem, Jew, Christian courts. All are fascinating.

I have just finished a children book published by, yes, Yale University Press: A Little History of The World by EH Gombrich. If you have an 8 years old inside yourself who is easily be distracted while reading long passages with difficult words like myself, this is for you. I feel like refreshing the whole of my high school history lessons, yet in a very simple and fun way, by reading this small history book from western perspective --if not Austrian perspective, for the author was born in Austria. This is the Sophie's World of western history.

The second book I read slowly now is Niall Ferguson's The Ascent of Money. Reviewed by Michiko Kakutani at The Times today, this tour of the role of money across the years is a page turner. It reads:

Angry that the world is so unfair? Infuriated by fat-cat capitalists and billion-bonus bankers? Baffled by the yawning chasm between the Have, the Have-nots--and the Have-yachts? You are not alone. Throughout the history of western civilization, there has been a recurrent hostility to finance and financiers, rooted in the idea that those who make their living from lending money are somehow parasitical on the 'real' economic activities of agriculture and manufacturing. This hostility has three causes. It is partly because debtors have tended to outnumber creditors and the former have seldom felt very well disposed towards the latter. It is because financial crises and scandals occur frequently enough to make finance appear to be a cause of poverty rather than prosperity, volatility than stability. And it is because, for centuries, financial services in countries all over the world were disproportionately provided by members of ethnic or religious minorities, who had been excluded from land ownership or public office but enjoyed success in finance because of their own tight-knit networks of kinship and trust...p. 2

Well said.

So long, Tanta

Our deepest condolences. Rest in peace: Doris "Tanta" Dungey.

Kids, get up! Traffic is bad out there.

Jakarta's deputy governor Prijanto thinks he can solve Jakarta's traffic problem by not tackling the problem. Instead, he will apply his draconian power to force your kids wake up early and be at schools at 6:30 in the morning. And he won't stop there. He will also force private offices in North and Central Jakarta to start at 7:30am, West 8am and East 9am. (So be very prepared. If your office is right on the border of North and East Jakarta, make sure the meeting room does not share the line! If you work in Central Jakarta and needs to call your colleague in the East first thing in the morning, just hold up; have some coffee and play some game instead until 9).

The deputy governor of course defends his silly idea. Quoted by The Jakarta Post today (25/11/2008), he says "How can people say it won't be effective when we haven't even run the program yet?". Yes, Mr. Deputy. How can people say eating dirt is not good when they haven't even tasted it?

Mr. Deputy also doesn't care with kids' rights: "I heard that some also said that the new regulation was against children's rights. Well, just look at the positive side. Getting up early will make children fresher than before". You're damn right, Pak. In fact, adults need that too. So why not force the lazy civil servants to start at 5am?

Prijanto, you're unbelievable.

Yoga, anyone?

I'm totally speechless.

A development practitioner's diary #2: what room do we have?

Recently I have been involved in a multidonor-funded sanitation project in East Java, in addition to my ongoing donor-related work, which has been more analytical. There are many non-technical issues that I think are too important to miss. In real world, those non-technical issuses are important, sometimes very important, for the success or failure of a research or an intervention program. I am going to share some of the experience in this 'Field diary' series. Earlier I have shared a first story; hence this post is the second one... (a.p.).

My friend -- that dumbfounded psychologist in Australia -- and I were chatting about the sanitation project. We talked about the background and objectives of the study, and how the intervention will (or is expected) to work. After exchanging several lines, he raised an important point. Here's an excerpt of the conversation.

DP: "Do you know what makes the villagers don't build their own toilets?

AP: "They said they don't have money. But looks that it's not the case as they can afford to buy cellphones, and some of the houses have ceramic floors or permanent walls. So looks like cultural aspects or lack of information matter."

DP: "Does the project try to find out what is the main reason for not having toilets?"

AP: "No -- the intervention aims to create or trigger demand for proper sanitation."

DP: "But how do you know that intervention works if you don't find out the real reason first?"

AP: "I'll tell you what. This is a development project, not a pure academic research... If you know what I mean, or try to read between the lines..."

DP: "Ah yes, got it... I should have thought more pragmatically...."

Moral of the story: in most cases, if we're running a development project, the constraints for what activities to do or what information to look for have already been set. Although sometimes we can play around with the constraints, or piggyback with an existing project, to do other activities or look for other information. I'll tell you in other posts.

CPO Price Dictator (If Any)

Khudori, in his op-ed in Kompas, lamented that:

We are indeed the world largest CPO exporter, but the price of Indonesian CPO has been dictated by Rotterdam spot market and Kuala Lumpur future market.

and he concluded

Last, as second largest CPO producer after Malaysia, Indonesia should be taking important role in the searching and making of product's price, not dictated by others.

Well, of course the equilibrium price is determined by not only supply (where Indonesia belongs to), but also demand (the rest of the world whose growth has been slumped). And how are you gonna "take a role" in making up the price? Reducing the CPO production, or setting up a cartel with Malaysia? It might not work either, since, perhaps, there are numerous substitute for CPO. I don't know.

By the way, does anyone know how much does the palm cooking oil price in Jakarta cost lately? Palm cooking oil consumer may not be happy, if you cut the CPO production.

Now which one is which?

We're INTP?

According to Typealyzer, we here are:

The logical and analytical type. They are especially attuned to difficult creative and intellectual challenges and always look for something more complex to dig into. They are great at finding subtle connections between things and imagine far-reaching implications.

They enjoy working with complex things using a lot of concepts and imaginative models of reality. Since they are not very good at seeing and understanding the needs of other people, they might come across as arrogant, impatient and insensitive to people that need some time to understand what they are talking about.

Ah, psychologists are amazing!

Not Tariff, but Subsidy and Bailout

Dede of Diskusi Ekonomi is apparently more optimistic than I on recent G20 meeting. Take international trade issue, he wrote that one of the important meeting's results was the agreement for not to adopt protectionism. Here is the official statement #13:

We underscore the critical importance of rejecting protectionism and not turning inward in times of financial uncertainty. In this regard, within the next 12 months, we will refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organization (WTO) inconsistent measures to stimulate exports.

This is surely a good policy. But the problem is whether the governments are effectively able to do that against own domestic political pressure? While they might not raise the tariff, which is a blatant WTO violation, it seems that the more subtle subsidies and bailouts are now gaining popularity --which is just another kind of protectionism. The US, for instance, now debated on whether or not to save those inefficient Detroit's big boys.

Dear Kate: Monthly or daily?

Dear Kate,

I'm a driver. My monthly pay is Rp 650,000. On top of that I get Rp 30,000 per day, "day" being defined as 7am to 7pm. Finally for each additional hour beyond that the boss pays me Rp 5,000. Occasionally, if I work at weekend, the daily rate becomes Rp 50,000 and hourly rate Rp 7,500. Don't ask me why this sounds so complicated. Ask the boss. What I know is that on average I get paid about Rp 1.5 million. I think that's because almost everyday my boss takes off late from office -- extra hourly pay for me.

Recently my boss offered me a raise. He asked me to choose between a Rp 100,000 raise on the monthly pay and Rp 5,000 raise on the daily pay. Any advice?

Thanks,
Complicated Driver @ Ciganjur



Dear Complicated Driver,

Mathematically they are the same. Both will end up a Rp 100,000 additional per month, assuming your boss works 5 days a week and stays home or drives himself on weekends. But if your boss is a workaholic and frequently asks you to drive him on weekends, than take the second offer. In contrast, you would take the first offer if the boss travels abroad frequently. Finally, if your boss' working behavior is quite random, definitely you should take the monthly based adjustment.

Kate
p/s I think I understand why he made it that complicated. Just ask yourself: do you like to shirk or not?

Dear Kate: What's the fair job division?

Dear Kate,

I'm a working mother with two naughty boys (2 and 1 year old). We hire two babysitters to take care of them (one for each). Recently our helper took off for mudik and never came back. So I have decided to extend the tasks of the nannies to include washing and ironing the boys' clothes -- of course with a good additional monthly pay. I've heard that economists always suggest division of labor. Any advice? Thanks. Busy Mother @ Depok.

Dear Busy Mother @ Depok,

Assign Nanny A for washing and Nanny B for ironing. Then reverse that on monthly basis. If only one nanny do both washing and ironing, the other one would have no incentive to limit the number of clothes coming into the laundry basket. Suppose for example that both tasks fall to Nanny A, Boy 1's babysitter. Because Nanny A would know full well how inconvenient washing and ironing are, she would be very concious that her boy doesn't play with too much dirt. That way, the number of dirty clothes can be minimized. But that's not the case of Nanny B. Imagine this. Every time Boy 2 spits on his cloth, no matter how small, Nanny B will just take it off, throw it into the basket then get a new, clean one. Worse yet, she would have less incentive to teach Boy 2 about living clean. Now, if you give her responsibility to iron the dry clothes, she would think twice. After all, she wants less clothes to iron later in the evening. Kate.

These things do happen...

You have carefully calculated your sample size based on some criteria (power calculation, impact size, budget, etc.). You have randomly assigned your samples into treatment and control groups. Your counterpart, in this case District governments, have agreed to commit to the random assignment.

Then, one morning, your local government contact called you:

How are you? Been a while since the last time we talked. By the way, sorry to inform you, but we have decided to give treatment to village X. I know, initially it was a control village. But we thought that the village is in a desperate need to get treatment. So, in fact, we have already started treating village X.

And this was not the first time you received that kind of surprise phone call. And out there, many still believe that a big donor like the Bank is a kind of super institution that is able to dictate governments here and there to get what it wants.

Note: anyway, in randomized trial, there are ways to deal with this; you can choose to apply the Intention to Treat analysis, or the Treatment of the Treated.

A Place for Inspiration

Tim Harford wrote about Avinash Dixit, who

"...once told young economists that a good place to have ideas was in front of the shaving mirror. Krugman has a beard. Imagine, quipped Dixit, how much he could have achieved if he shaved!..".

My good place to think about good ideas is under the shower's overhead nozzle. And you will know that you lead toward right direction for your ideas when you start to use shampoo to wash your body without even realize it.

Where's the Beef? (2)

As predicted by The Economist, the recent G20 meeting, despite

several have talked grandly of a sequel to the 1944 Bretton Woods conference, which created the post-war system of fixed exchange rates and established the International Monetary Fund and World Bank. That is nonsense. The original Bretton Woods lasted three weeks and was preceded by more than two years of technical preparation. Today’s crisis may be the gravest since the Depression, but global finance will not be remade in a five-hour powwow hosted by a lame-duck president after less preparation than many corporate board meetings.

The meeting turned out to have just a little beef, especially when it comes into the ambitious plan for a new global financial architecture. But was it really a waste for Indonesia to join the group?

Maybe not. We have two concerns regarding the current crisis: to maintain sensible balance of payment (and exchange rate) and to secure financial sources for the state budget --you know, to fund basic infrastructure, pay salaries, and poverty reduction related actions. The former might not be solved by, predictably, the inability of the meeting to agree on above new global financial structure, but there is an opportunity to ease the latter. And here is how.

It is now widely argued by key policy makers and some prominent economists that a world fiscal stimulus (tax cutting or more government spending) and, some say, higher liquidity through lower interest rate are needed to boost the otherwise slowing world economy. But we don't have the money to do so, because the market sources for state budget financing, the government bonds, is now becoming very expensive. We need different sources.

If Indonesia went alone in asking this to the developed countries, it is likely that we'd meet with no response for two reasons: we're too small (yes, contrary to some of you believe, we're a small open economy) and those big boys don't have lots of money either. The best option available is to join forces, mainly with developing countries, to tap the money -by the way, China and Saudi Arabia now has the money - and to elevate the bargaining position before those big boys to give more money to either bilateral scheme or multilateral agencies like the IMF and the World Bank. At the same time, it'd be also the right time to ask IMF to be less strict on their conditionalities, the sources of domestic discontent and political unpopularity in many countries, including Indonesia.

Of course, it is now more international politics than economics.

Where's The Beef?

In relation to G20 Summit here, WSJ reports that:

Dominique Strauss-Kahn, managing director of the International Monetary Fund, said coordinated stimulus amounting to at least 2% of global gross domestic product is required. That should provide a similar boost of 2% of GDP, if it's correctly coordinated, he said.

Stimulus, you said? If truly so, where is Keynes the multiplier, please?

What's the diff between FPI and WITT?

This is insane. An NGO named Indonesian Women Against Tobacco (WITT) is going to raid smokers in Jakarta's public places. Apparently law enforcers are too weak they need all this militia groups? What next? Another NGO raiding people that chew bubble gum? What if I hate dangdut concerts that ruin my sleep at nights? Will I and my NGO, Indonesian Slumbers Against Noise, be allowed to raid them from the city, too? Ridiculous.

Minimum wages and SME

From Sensus Ekonomi 2006 (quoted from a seminar presentation):

The data supports the sentiments such as "SMEs are important to our economy as they create most of the employment" kind of thing. I agree. Now look at the average wages they paid to the workers. Here is the question: if we keep increasing the minimum wages, and enforce it, who are to win and who are to lose?

Wages, unemployment and formal employment

Take a look at these charts:
Here's how I read them. First, (A) and (B) show a strong association between real minimum wages and overall (average) employee wages. The relation was most obvious between 1999-2003. This shows that minimum wage has become an arena of collective bargaining. Wage negotiation happens not in the private sphere (within company) but in the public sphere (policy). This indicates an institutional failure in the labor market: bipartite negotiation. Since 2003, real minimum wage has been relatively stagnant, so has the overall wages.

Second, (B) and (C) can be divided into three periods. Prior to the crisis (1998), all went well in the sense that wage was growing, and so was formal sector employment. From 1999-2003, when wages was increasing rapidly, share formal sector employment declined significantly. After 2003, wages has been relatively stagnant. It is no coincidence that formal sector employment started to expand.

Note: 1) you won't see the relations as significant if you just simply take one point of time and compare it to another (say, 1999 vs. 2008). 2) a colleague of mine did an econometric estimation and confirmed that every 10% increase in average regional minimum wages is associated with 1 percentage point decline in the share of formal sector employment a year later.

Third, I didn't put it on the picture -- but apparently there is an obvious relations between wages and unemployment. Our friend Suahasil Nazara and his co-author Iyanatul Islam might be right (like Card and Krueger). But I second Prof. Aris Ananta that unemployment rate may not be the best labor market indicator, as it doesn't tell much about job quality and welfare. In such case, formal sector employment should be a better indicator.

Now the question is who wins and who loses if the minimum wage is increased?

Sultan for President? Or I thought you want a younger one?

I never like the idea of kingdom. So my first reaction upon hearing that the Yogyakarta's Sultan Hamengkubuwono X is running for presidency is: what, are we now turning back into a kingdom like Thailand? Suddenly those images of people asking for blessings, a state full of divine ceremonies, and worst of all, people misled perception that The King is a direct representation of God full my air. Of course I'm exaggerating.

But just curious. Whatever happened to the "It Is Time For Young Generation" campaign by Sukardi Rinakit and his friends? Is suddenly the Sultan now younger than Rizal Mallarangeng, Fadjrul Rachman, Zulkifliemansyah, or Sukardi himself? Where is Indra Piliang by the way?

Comparative (dis)advantage

This morning I set my Facebook status as "...experienced a water supply problem, so had to carry buckets of water early in the morning..."

A friend commented on the status:

"[Maybe it means] a signal [of a] distortion in the water market? ;)"

(I noted the wink symbol so I know he was joking).

Here's my reply:

Nah, nothing to do with market or distortion. It was just a stupid mistake to forget switching on the jet pump, so the air went into the pipes and prevented the water from flowing.

In short, it was physics, not economics. The problem is I was trained in the latter, not former, subject.

Note: This post is dedicated to non-Facebookers. Rizal is one of them.

Rest in victory: bombers

So they're finally dead now, the Bali Bombers. Many of my fellow libertarians oppose death penalty, but as The Jakarta Post says in its editorial today, they probably make exception this time.

I have just the opposite view. I always support death penalty, for its deterrence and disincentive effects. But I would make exception this time for those Bali bombers. Their goal is to die as martyr. So don't kill them, 'cause that would mean giving them what they want. Instead, torture them to the maximum level, but sufficient to keep them alive. Cut their fingers one by one. Chop their ears. And so on. But just don't kill them. Do this again and again. Invite the media.

Ah I guess I'm too late now. They have got their victory already.

Update: This is my post on similar issue at Diskusi Ekonomi sometime ago.

Why Culture Matters

After being scolded by the baristas for doing a crappy job, the Manager dug up her emails to recover the yet-to-be-posted article submitted by one of our favorite guest hosts, Roby. You see, Roby complained that his submission about “toilets and culture” was never posted here on the Café with nary an acknowledgment from the management, which shows just constipated (sorry, can’t help it) our “review” process is (hint: it involves email forwarding and little else).

The Manager finally found the said submission, originally received by the Café in December 2007. The only problem is, instead of “toilets and culture” the post was more about “table manners and culture”. There may be confusion between things that are going in one end and going out the other end, that’s understandable (happens to the Manager all the time). In any case, the post is indeed very relevant to A.P.’s toilet contribution. So here it is, without further ado, an excellent rejoinder.

- Kate, the remorseful Manager

Why Culture Matters

by Roby

It is common to put culture and the concept of economic man in a diametrical term. Taking the risk of oversimplification, the debate can be summarized as follow. The cultural argument argues that people behaviors are largely determined by cultural scripts, not by rational cost-benefit calculations. On the other hand, economic argument insists that individual decisions are independent of cultural factors.

Here I would like to argue that the picture of economic men is still plausible in cultural analysis and culture is a necessary prerequisite for rational calculations.

The key here is to see culture as a toolbox. That is as a set of tools that are accessible for solving problems. People face problems in their daily lives and use whatever they have in their toolboxes to solve the problems. Once they have picked a tool, they can use it in a highly rational way. This rational calculation, however, is only possible when a person has chosen a tool.

For example, imagine a group of people who use their hands when they are eating and another group who use utensils. Now because of health concern, we want to make those who use their hands to switch to use spoons and forks. Economists tend to jump to the conclusion that the whole problem can be solved by finding the right incentive. As they soon found out, however, the former group did not switch even though they completely understood the health benefit of using spoons and forks.

The problem here is that the first group does not consider spoons and forks as eating tools. For them, eating using spoons and forks is as absurd as, say, eating bugs. They just don't do that - despite the fact that bugs have nutritional values. Therefore, persuasion, bargaining, socialization and inspiration can be as much useful as incentive.

If we see culture as tools, then the rational calculation only applicable to available tools. We cannot perform cost-benefit analysis on the tools that are not part of ones' toolbox. Therefore rationality is local instead of global. It is in this sense culture matters for economic analysis. On the other hand, cultural analysis would benefit by applying rational choice to understand behavior in a given context.

Of toilets, faeces and open defecation

Yes, I've been absence for a while from this cafe. Unlike Sjamsu, I haven't been performing in The Police and Queen nights. Unlike Aco, I haven't been winning any awards. Unlike Ujang, I was happy that Liverpool has beaten MU and Chelsea.

I have been traveling recently to some places, mainly to East Java, for a rural sanitation project in eight kabupatens. I visited some villages, and in many villages I found that only 1 every 9 or 10 households that have in-house toilets. They do most of their business in the river or bushes. Of course, it is easy to think the relations between open defecation, health problems, human capital, and productivity. We may also hypothesize that poverty is the reason why they don't have in-house toilets.

However, most of them have brick or concrete houses, sometimes with ceramic floors. And almost every household have at least one cell phone. So cost (supply) can not be the constraint -- demand looks to be a bigger problem. This may be due to 'culture-related' sanitation behavior, lack of awareness, or whatever reason. The point is, if you just simply build public toilets or subsidize people to build one in their house, such intervention may not work. People will just go back to the river or bushes.

This is where I agree to our friends Tirta (and Roby, among others), that psychology and understanding the nature of social interaction is important. In fact, the project in which I am involved aims to create demand for proper sanitation. What we do is, open community meeting, we ask the villagers to: 1) draw their local map, 2) ask them to identify which houses have toilets, and where do the rest go for defecating, 3) invite them to do some mental exercise in counting how much faeces they are producing in a day, week, month and in a year. After that, we ask them who wants to build toilets equipped with septic tank.

If 1-3 don't work, we then ask them to go to the spots where the villagers do their usual business. If this also don't work, the strategy is to take real, fresh, faeces in front of them then discuss the possible transmission of virus and bacteria to human's body. (Well, if this also doesn't work, then, from the perspective of the project, we're in a deep shit...).

Of course, this efforts may or may not work. Despite all the campaigns, maybe only a few people want to build toilets in the end. Even though many people build their own toilets, their health situation may not improve. This is why we are doing an impact evaluation (in fact, I am involved in the evaluation side of the project, not the shitty activities one). After collecting the baseline data, in a few months up to a two-year period, we will be collecting some data on the health status. Then we will compare the data in the 'treated' and 'control' villages. We'll see the result in 18 months...

The Law of One iPod nano's Price

Let's talk something more interesting: 8GB iPod nano.

Theoretically, you can buy iPod in Fifth Avenue Apple Store or the one in Ratu Plaza Jakarta at the same price. Say, if it is 149 USD in Manhattan, it would be current IDR per USD exchange rate times 149 in Ratu Plaza to bag the same iPod nano.

In economic jargon, it is called the law of one price, assuming a free flow of goods and arbitrage. But it doesn't always hold.

According to an iPod nano index issued by Australia's Commonwealth Bank, if you buy it in Ratu Plaza and pay its IDR price tag, you actually pay 10 dollar lower than buying it in Manhattan with its USD price. Why? because probably in the last month, we saw a weakening IDR nominal exchange rate.

If Indonesian product is now relatively cheaper due to currency depreciation, export might go up, yes? Maybe not, because the other half of the story, the world's income that determines world demand plunged due to crisis.

Back to iPod, based on my experience with the Apple vendor, and for that matter any electronic gadget vendors in Mangga Dua, Roxy, and Glodok, they will quickly adjust their IDR price. Many effectively pegs their price to USD. As a result you end up paying the same price.

HT: Marginal Revolution

Disclaimer: This is not a signaling attempt that I am a Mac person --therefore cool-- as Kate the Manager once accused me.

Consequences of Obama's victory in Indonesia?

What are the likely consequences of Obama's victory to Indonesia? Does the country really mean much more to US now because the new president happened to live here? ("Oh, he was once lived here." Well so what?). Will protectionism in Indonesia be on rise again? ("Look, that new president isn't so friendly to global free trade. Why aren't we? After all the crisis requires more and more protection." From what appears in the media lately, the sentiment is growing. Obama victory might give more ammunition to that).

To T/S and the likes

Dear Treespotter,

Thank you for your letter. It is so sweet I've been crying all night long. Not that I'm the weak little girl here. But because it, your letter, depresses me. I've been trying to concentrate on my thesis. Damn, if only I knew it could be this tough, I wouldn't have majored in economics. I blame that on the barristas here. Yes, those five disillusioned, irresponsible econ chauvinists: Aco, Ujang, Sjamsu, Ape, and Rizal. They're the ones who made fall me in love with economics. Frankly at first I thought economics was bullshit. I hated economists, they behave like they know everything. But as I started hanging out in this Café, I often overheard them guys talking. And boy, it's interesting. I realized economics is not just about growth, inflation, and employment. It is about why people do what they do. So there I was. When there was an opening, I immediately applied. And I became the manager of the café. The pay is pretty, but it's not the only thing I factored in. I loved the environment too. One thing led to another, I even applied to an economics school.

Then things changed. Apparently I put too much faith in the ceteris paribus dogma, I wasn't all prepared when the fun barristas started to cut their time in the café. I knew they did that because they were involved in many other but also useful things. At the same time I started to write my thesis -- "skripsi" as they call it here. So I too have less time. (Frankly as I desperately needed advice for my thesis only to find all the barristas were busy, I considered quitting. But I changed my mind. This café is still the most fun place for me, even though them barristas can be nasty). Good that the café is still alive though, albeit less frequent happenings. But we -- the barristas, the guest mixers, and me, will all come back safe and sound. I, for one, am still the lesbian cute manager who will resume playing music soonish. Aco will have to resume his Econ101, otherwise we keep cutting his paycheck. Ujang will post again from somewhere rural. Sjamsu has promised to come back in-between his gigs (I hate it when he spends more time with his band playing Queen or whatever somewhere and less time playing here. But I think it's because I have been too skewed to jazz (well actually to hip-hop too recently). OK, I'll play some rock. And yes, we've got Pasha for music too). Ape will report more on his noble fight against poverty. So far Rizal has been very loyal (although I know it's because he's stressed out with his exams there).

Finally let me tell you about my thesis I have been mentioning above. I'm working on the economics of Facebook (another reason I spend more time there than here). I'm interested in how people signal each other through that thing. My hypotheses are firstly, Facebook will provide a way to market to discipline so-called observers. Before, we have seen observers or commentators or op-ed writers (or "pengamat" as they call it here) talk so much bullshit without reservation. Now you can criticize them immediately via Facebook network. They will get aware and conscious. (Blogs to some extent fail to deliver that service). Sooner or later the writers will realize this. They will seek balance between revealing much at the Facebook at the cost of exposing themselves to direct check by "friends" and the enjoyment of "social-networking" (sorry Aco, you don't like this term, I know) at the cost of having to be really careful in saying or writing things somewhere else. The easiest control for this is arguably the size of your network. In other words there is an optimum level of network size (i.e. the number of friends you have in the Facebook) so as to leave you in a comfort zone. I'm interested to find where that level lies, given types of people, and not just op-ed writers.

Secondly, Spence signaling theory is alive and well. Add to that the revealed preference principle: trust what you see, not what you hear; trust what people do, not what they say. It is very interesting to see how people try to make others believe what they are. Hence, the urge to get into the middle, to appeal to the majority. Or to be exclusive, for whatever reason. Many people tone down their otherwise strong ideology so as to get more friends from "the other side". Some do just the opposite so as to be perceived as a sexy eclectic and hence getting more friends from "the same side". Some put their academic titles so explicitly, their first names are professor or doctor. Some buy Blackberry and can't wait to let people know when they download Facebook-for-Blackberry. Some keep reporting their status with different cities to reveal their big fly mileage. Some students use that to make fun of their teachers and professors (some are so excited they sound silly). Some are just so cool.

So that's it, T/S. I've been busy. And pardon me that I don't care with the current crisis. Maybe the barristas do. But thank you, I'm nostalgic too. Buy me drink?

Cheers,
Kate Salemba (see, the damn Facebook has forced me to reveal my identity)

Economist as Countercyclical Profession

Tyler Cowen's on the impact of current US financial crisis and economics professions:

I believe that demand for economics classes will rise, as it often does in economically troubled times. Some of this will be "shaman demand" rather than "knowledge demand." The consulting incomes of finance economists will fall and fewer talented people will go into finance. Speaking fees will fall since fewer economists will give talks at hedge funds. The relative status of macroeconomists will rise and the relative status of microeconomists will fall. Economists will gain in fame and lose in income. What do you think?

Now, if the crisis happened in Indonesia, how does it have something to do with the profession? This is what I thought:

The demand for economics classes will remain low, or stay the same, and I think "knowledge demand" is always thin in the country. But speaking and consulting fees will go up (yes), and the fame too. Or if you do not yet get your economics degree, at least the crisis will make you more popular in cocktail conversations.

I think in Indonesia the Sadli law --named after economist M. Sadli-- holds. It goes: regardless of many deafening political rhetorics in the media, when crisis happens, demand for sensible economists and economic policymaking and technocracy is up. But when the economy runs well, the populists and populist agenda are more likey to mess up get into policymaking.

Old Policies Don't Simply Die

In an interesting paper of The Political Economy of Controls: American Sugar, by Anne Krueger, the closing paragraph reads:

"...at the very least, economists advocating government intervention in markets would be well advised to recognize that the measures they advocate will, once enacted, have a life --including supporters-- of its own.."

I think this is why the series of measures introduced by well intended Indonesian economists decades ago --rice price stabilization and import restriction, fuel subsidies, to name a few --, are still fiercely defended by many supporters regardless their irrelevancy to the current situation.

Capitalism is Dead. Not.

For those who wished that capitalism would die due to the current US financial crisis --and socialism to arise--, this editorial from the usually liberal (in US politics term, that is, a left-leaning) Washington Post, may come as a bugbear. The first paragraph reads:

Is this the end of American capitalism? As financial panic spread across the globe and governments scrambled to contain the damage, reality seemed to announce the doom of U.S.-style free markets and President Bush's ideology. But this is wrong in two ways (...the bold is mine...). The deregulation of U.S. financial markets did not reflect only the narrow ideology of a particular party or administration. And the problem with the U.S. economy, more than lack of regulation, has been government's failure to control systemic risks that government itself helped to create. We are not witnessing a crisis of the free market but a crisis of distorted markets.

Also, it would be interesting to see what's gonna happen to Hugo Chavez's oil-financed socialism as the world (ironically, capitalistic) economic growth decreases and brings the country's oil demand and price down.

And What Happens to Indonesian Economy

So you want to know what the impact of current global financial meltdown on Indonesian economy is? Dede Basri of Diskusi Ekonomi gives you some of the answers in this readable economic (mind you, economic) writing.

To get a better grasp for the center of his argument, you need to understand at least the straightforward national income accounting and balance of payment identities (ask your economist friend to tell you this concept over a coffee, if you don't).

On what makes BI raise interest rates, he wrote that the step is justifiable as an attempt to stem the domestic demand for import (while export declining) at the time of low capital inflow. The failure to do so might deplete the foreign reserves and lead to deeper Rupiah depreciation.

It is also to give signal that in the medium term, the BI still concerns with and runs its main job -keeping the inflation low. In this respect, Ross McLeod of ANU's Indonesia Project wrote why monetary expansionary policies, including lower interest rate, might not be desirable:

(But) base money has already been growing far too rapidly to be consistent with the current target level of about 5% inflation, which has risen from about 6% in the middle of 2007 to more than 12% in September this year.

How The Baristas Here Usually Think About Thing

I read in Kompas, now the price of cooking oil --the palm oil -- decreases. Sounds good? Hang on a sec. What about this report from the same daily: the cost of growing crude palm doesn't add up to the market price for farmers like Bahori and Syaifudin.

Economics would not tell you whether this development is a good or bad thing (You've been warned: be curious to economist who loves to play around with too much normative statements based on moral grounds). Instead, economics can tell you that as world demand slows down, the price goes down, and some of input producers adjust their production based on their cost structure --and the other way around.

It is why in the first lecture of any Econ 101, the first lesson is that economics deals with positive argument --what it is, not what ought to be. It applies cost benefit framework in looking at thing, and argue for, if not a Pareto efficiency, a Kaldor-Hick efficiency --what gives you larger net benefit or least cost. The students are trained, as simple as it may sound, not to think single-handedly but to always look at the other side of story and apply the simple idea of opportunity cost while estimating the cost of an action.

That is why I often feel desperate when reading the media or upon hearing politicians'/pundit's comments.

Don Paulson Way

Michael Corleone in the classic Godfather once said:

I'll make him an offer he can't refuse. You see, Johnny, we feel that entertainment is going to be a big factor in drawing gamblers into the casinos.

Last Monday, I can imagine Treasury Secretary told the nine US largest bank's executives:

I'll make you an offer you can't refuse. You see, folks, we feel that banking is going to be a big factor in drawing the economy out of the depression.

By that, the US effectively partially nationalize their banking system. How cool (and scary) it is.

But how can he make sure that they will lend the capital they just got? Another mafia-way?

It shows that the market does work!

I once heard that the US economy will never collapse because of three industries: music, books and film. The music industry seems to be fading away due to piracy and MP3s. But this and that articles show that the industry is searching for a new model. Apparently we shall never underestimate how the market economy works.

Now tell it to our fellow Malaysians...

Crunching Lebaran, Hidden Fear ... or Power?

Lebaran, the Eid Day in Indonesia is certainly something too interesting to take for granted. It can be religious, cultural, personal. And economic, too. A friend of the Café, Lynda Ibrahim shares her reflection. Like the barristers here, Lynda was at the Salemba School before she went to US. She's back in Jakarta now and among other things, writes for The Jakarta Post. Enjoy.

-- Manager

Crunching Lebaran, Hidden Fear... or Power?
by Lynda Ibrahim

Much has been written on Indonesian Idul Fitri rituals like mudik exodus, city slickers doing chores and herding to malls for food cause maids are off, or Jakarta’s empty streets and clearer air. Idul Fitri is supposedly the victorious day of rebirth, if a Muslim successfully atones for his or her sins through a series of purifying acts and prayers during the holy Ramadhan. Ideally, starting fresh with renewed hope, strength and limitless possibilities.

But how do you keep the spirit alive during a far less ideal time?

While living overseas I had to spend the period in starkly different settings than what I’d grown up in. Braving Ramadhan during winter, dying to gulp down hot chocolate while I had to simultaneously survive the weather and ace finals. Spending Idul Fitri as a student taking a comparative study in Chile, definitely the only Muslim within the school’s group and possibly the only one in the entire area by then. There’s something a bit surreal about swimming in one of Puerto Varas’ picturesque lakes that morning, while imagining my family celebrating back home. But I wasn’t sad. I’d just started my graduate school, was finally visiting the region I’d been so interested with while practicing my newly acquired Spanish, and plotting the next summer internship. Things were looking up and I felt fearless.       

Life changed dramatically just a couple of years later. I graduated right after the U.S entered a mild recession in early 2001. Many graduating Americans didn’t have a job offer, so I was grateful that I got one in my field of study. The company even sent me on a stint in a regional office outside the U.S., enabled me to momentarily taste the so-called high-flying expat life. All peachy until 9/11 dragged the U.S economy further down, causing massive layoffs. That year, I found Lebaran falling on my birthday while also marking my first official day out of employment.  

Surreal couldn’t even begin to describe how I felt that day. The irony of being supposedly reborn victoriously, compounded by supposedly doing better as turning a year older, while in reality you lost the fight thanks to a left-field attack you didn’t even see coming. I probably went through almost all steps of grieving as I moved through the day.

I was on denial of the awaiting downhill as Alika and her children woke me up midnight with birthday cake and candles. I felt anger as I went with Krisna to the morning Idul Fitri mass prayer, knowing that thanks to one misguided group’s actions other Muslims had to gather and perform prayer that day under authority supervision and Islamphobia in the air. I got sad as Bridget dragged me to a joint birthday dinner in the evening, sincerely wishing her the best for her birthday yet not knowing what to celebrate for my own. I missed my parents at such trying time, yet thankful they weren’t there to see their child so beaten and morose.

Looking back later, I realized there must’ve been some sort of inner energy prevailing somewhere in my deep unconscious mind by then that saved me from spiraling down and made me get out of bed the next day, bruised and afraid, to fight for better things that were yet to arrive. So while still going through the grieving cycle I eventually started anew, repatriated and made best with chances I saw.

It’s the same energy that I’m hoping to draw from this year. Granted, my Lebaran last week was within our usual traditions; my parents’ house full of friends and family, including my cousins’ screaming children who went from cheerfully picked Mom’s prized orchids to carelessly murdered her goldfish. But as I chatted up guests and chased the kids around, my mind was consumed with the embroiling turmoil and wondered if the USD 700 billion golden parachute would save the day.    

Thus certainly was unnerving to watched how worldwide markets negatively reacted this week; so wild the freefalling on Wednesday in Asia that JSX got suspended half through the trading, the UK bailout failed to lift Europe markets and 7 central banks interest cut only swung Wall Street violently without a positive ending. Panic bred more panic in a seemingly unison confirmation of global downfall, which isn’t a far stretch considering Iceland, an actual whole country, is bankrupting.

I’d seen my portfolio shrinking and don’t even want to know how much that intended life-saving lost this week as stockmarket rebounds eventually. My worries are on whether our once shaken, though-restructured banking system can withstand this time and keep safe of small cash I have left. On how much more spending power will drop and whether my budding businesses will find enough customers to survive. On when our factories don’t get the usual much-relied Christmastime export orders, how that will trickle down to the average Indonesians early next year, just in time before our election when even in normal time fear would breed more fear, and where majority of our voters are still low-educated, less-exposed citizens who may fail to understand that this time the crisis is largely an unavoidable effect from a global recession rather than, as mostly was the case of ’97-’98 crisis, a mismanagement of the ruling government. On whether I and my unmet husband could save enough for our unborn children’s college funds, because at the age group when one is supposedly most productive the global recession befalls on us.     

Dogged determination. Blind faith. That all isn’t lost yet. Or even sheer pride of not letting myself get defeated. Whatever gets me through the day. Because fear, I have some this week.

And The Nobel Prize Goes to....

Paul Krugman of Princeton and NYT columnist.

His academic work on increasing returns to scale in the international trade as well as economic geography are surely worth the Nobel-- although his partisanship tone in his NYT op-eds somewhat discounted it. But no doubt, Krugman is a prolific writer and as an economist, one of the best.

My favorite book is Pop Internationalism when he debunked those funny pundits' faux international economics theories by not only pointing names, but also deploying superb writing skills. Before becoming columnist, he was the most effective guardian against the economics illiteracy in public discussion. Lately, ironically, as a pundit, he has been the subject of the same contention.

He also earned fame for being 1998 Asia crisis analyst, partly due to his somewhat unrelated pre crisis column in the Foreign Affairs in 1994, The Myth of Asia's Miracle. Borrowing Alwyn Young's Asian countries' TFP analysis, he concluded that the high growth, the miracle, was not a result of total productivity but very much capital accumulation which is subject to diminishing return. I think this piece was my first encounter with Paul Krugman.

To me, and the baristas here, (early) Krugman's are the example for popular yet effective, no-nonsense, writings that get the economic theories right.

Slamming Neoliberalism by Setting Up A Straw Man

Martin Manurung wrote an op-ed on the US crisis in Kompas daily. I think he made some points.

First, the US administration doesn't give you a good example of neo-liberalism (or to be precise, classical liberalism). My take: agree and by that, it is wrongheaded, like many of us would like to do, to identify classical liberalism with what US administration does and has done.

Second, when it comes into what makes the crisis, Martin said:

Initially, many corporations have been given incentives to grow by excluding them from regulations that impede wealth (or capital?) accumulation. They are "being facilitated" by regulations that deliberately made easy that let moral hazard through the creation of various "peculiar" and high risk financial products.

Yes, some government regulations seemed to facilitate that peril. Fannie Mae and Freddie Mac, for example. They are government sponsored programs.

Third, he also said:

It strongly suggests that the return of state role in the US tends to become an effort to protect more capital owner than public. The thesis of the state as capital owner's benefactor, as had been said by Karl Marx, is really manifested in the US crisis.

If so, can we just get rid of minimize the role of the state?

Well never mind, but can we just see the bailout as an attempt to save the economy in general, too --regardless whether you like the idea or not?

p/s: I am reading an open letter to my friend on the left (HT: Aco)

Overheard on Facebook: Why (many) Economists Prefer Obama

Apparently triggered by The Economist's recent survey:

Guy 1: Huh? Pro-market economists now prefer Obama, the Democrat? Whatever happened to the Republican bias? Ah. Maybe the magazine's assertion is true: Bush has ruined everything. Even its market ideology.

Guy 2: Or... possibly because McCain's more likely be supported by more "established" economists, which also are less likely to respond to surveys...

Guy 1: Possibly. But if it's true then I want to know why "established" economists and their younger peers would have such different views. In any case this "survey" is probably as (un)scientific as the list of 500+ economists endorsing McCain's economic plan. But this comes with pretty graphs.

Guy 3: Is it because *established* economists think responding to surveys is irrational? (LOL)

Guy 2 to Guy 1: One possible hypothesis is if establishedness is correlated with age, there may be greater homophily with McCain amongst nonrespondents.

Guy 2 to Guy 3: Opportunity costs for established economists in responding to surveys may be higher. (But this can go both ways).

Guy 4: Or maybe, just maybe, many that responded was reflecting politics over economics. Many sane economists are liberal (in classical terms, i.e. libertarians). And many of classical liberals/libertarians oppose war. Obama opposes Bush's wars, esp Iraq. McCain is going to continue it.

Guy 1: That's a very plausible explanation. The survey merely reflects which candidate the respondents will vote for, all things considered. The war is one thing, the general notion that the administration and the social conservative wing of the GOP are at odds with science (e.g. intelligent design vs evolution) is another thing.

Guy 4: Or, (while i'm speculating, haha), NBER is in MA. MA is a blue state (LOL) Yes, of course the NBER economists come from different places, but being housed in MA, they're exposed disproportionally in favor of Democrat Party's campaign, I guess (speaking of imperfect information)... i'm talking about what the survey calls "unaffiliated economists" (those not identifying themselves as democrat or republican)... Again i'm speculating (LOL)

Guy 5: Or.. (nonsense talking)... those who responded are inspired, young-mid aged economists who are keen to see capitalism to have market self-discipline, not market orgy/gang-bang of capitalists. While established economists are like dead men walking (they're as old as Friedman) and had enough of those parties in the mid 80s - late 90s