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.