Sunday, October 19, 2008

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.


  1. Rizal, it might well be a nice idea, if you specify what "economist or economics" you are refering to.

    Efficiency is only one of the categories in the realm of public policy. Students of Social Choice (this is economics!) are thus more appreciative to the ideas of Arrow's impossibility theorem or the works of Amartya Sen.

    Kaldor-Hicks or the notion of Potential Pareto Improvement (or, call it BLT/Bantuan Langsung Tunai, in its blatant form) does not stand the debate, as some scholars have argued. For a quick survey, Stiglitz's lecture (in 1998's Journal of Economic Perspective) lists its limits, if not failures. The more theoretical involving treatments are found in the works of Scitovsky, Sen, etc, long time ago.

    To be fair, if the IMF and Cafe Salemba share its virtues, then I guess, there muss be some reasonable arguments in those "illiterate" commentators.

    - Sonny M

  2. Sonny, it's in Becker's The Economic Approach to Human Behaviour and Friedman's The Methodology of Positive Economics --a short summary here, taken from Diskusi Ekonomi--. Also, naturally, early chapters of any Econ 101 book.

    And why does IMF have something to do with Cafe Salemba here?