RIP: Gary Becker

I don't really recall it, maybe sometime in the late 1990s, that my co-barista here, AP, bragged about showed me a book he just read: The Economics of Life. It took me another few years to get my own copy while visiting another co-barista, Aco, in Urbana-Champaign, and that's my first introduction to the work of Gary Becker.

And, believe it or not, it was not a smooth sailing. Partly because I was still persuaded by some leftists ideals, partly because I was not familiar to the first world problems discussed in the book (such as baseball), and partly, probably the most important reason, because I still did not really get what economics is all about.

Until I read The Economic Approach to Human Behavior (1976).

Eleven pages Introduction of the book is really an eye-opener to me, who had been doing economics for some time without being fully aware of the methodological very basis of the discipline: maximizing behavior, market equilibrium, and stable preference.

Then I took a course on Economics of Non-Market Behavior taught by one of Becker's favorite students, Larry Iannaccone. There, I read lots of Becker's work and learned to develop intuitions to see any human behavior or social patterns using economic approach i.e price theory. For a class assignment, I remember trying to propose topic on why people believed in rainmaker (i.e shamanism) and a classmate pondered why many New Yorkers love dogs.

Reading Beckerian economics feels like that you're given a lightsaber to deal with various social issues. Not everybody on the other side will be happy with that, but it's a powerful tool nonetheless. It also helps you a lot to be a well-reasoned social commentator. Although not necessarily makes you the most popular person in a cocktail party, it helps you to actually take side on things (read: policy issues) consistently. Personally, it really provides me with a solid framework to discern seemingly messy and complex social issue and human behavior.

Now, to bring it closer to home, too often our economists and/or economic commentators in the country too easily depart from economic approach in their analysis -- if they ever held it once. It might just show a sign of intellectual laziness or simply ignorance for basic tenets of economics, namely basic price theory derived from three axioms above. But either way, it's a pity. What else we can expect most from a person trained in economics if not an economic analysis?

Instead, oftentimes what we see is an economic analysis that never was. Following Beckerian revolution (some say imperialism), it is inevitable that economist discusses social issues. But it is of little use if she/he does it without applying his/her economic approach and, god forbid, resorts to normative analysis. Becker himself, after laid down his economic approach, carried on to demonstrate how to do it on issues such as crime, addiction, fertility, discrimination, etc.

I often get impressions that these "economists", after presumably going through those curves and math in the classrooms, do not seem to get that "...economics is not a field of inquiry, but rather a method of analysis..". Their comments on various social issues reflect very little, if any, their educational background.

Even worse many of them trade their hard-earned economic tools and skills for populism.

This may indicate a deeper problem: our economics education failed to equip students with the lingua franca of the profession. No, it is not the math (although that is, too), but the language of basic price theory and the economics of incentives (Heckman, 2011). As a result, first, we can not communicate clearly with economists at the frontier of the field and/or follow large bodies of latest development in the profession. Second, in communicating with non-economist, we do not sound like an economist.

But anyway, RIP Prof. Becker. And thanks for the lightsaber.

And The Medal Goes To

Esther Duflo of MIT. She obviously very well deserves for the medal indeed. Congratulation.

Your barista Ape, her fellow randomista, will probably serve you a review on what Prof. Duflo has done and brought her to the prestigious John Bates Clark Medal.

What Surnames Can Tell You

When you hear the word England, what crosses your mind?

Harry Potter, Prince Harry, David Beckham (meh), Spice Girls (yes), fish and chips. Maybe if you are a bit literate Jane Austen's Pride and Prejudice, and if you're exposed to social science a rigid class structured society.

The last bit is problematic. If indeed England has low social mobility, why the industrial revolution took place there after all? Capitalism, innovation, and technological progress would not flourish if there is no reward for innovators. A rigid class based structure prevents social reward goes to the capitalists or innovators.

Greg Clark of UC Davis investigates this question in a very clever way. He goes back 800 years earlier, digs the archival records, and looks at the surnames. Yes, surname, as it indicates the initial position of a family in a social structure 800 years ago, and tracing it all the way to today can illustrate how social mobility takes place.

Clark finds:

England, all the way from the heart of the Middle Ages in 1200 to 2009, is a society without persistent social classes, at least among the descendants of the medieval population. It was a world of complete social mobility, with no permanent over-class and under-class, a world of complete equal opportunity.

This work shows that economic history is a vibrant subject. Contrary to common belief, they have a very creative way to look at historical record and come up with often times striking new finding out of old stories. Greg Clark is one good example, Avner Greif of Stanford is the other.

Our own economic historian is the respectable Prof. Thee Kian Wie, and you know what, having attended his seminar, I can say that Greg Clark resembles young Thee Kian Wie -including his remarkable humility.

And The Nobel was (not) given to…

Update: a typo in the 7th paragraph has been corrected. Thanks, Roby. Also, take a look of Haryo Aswicahyono's nice analogy of Williamson's work here (Facebook member only).

If you are betting on Oliver Williamson winning this year’s Nobel Prize, congratulations! According to Ladbrokes, his odd was 50/1. Elinor Ostrom was not even on the market as she is a political scientist by profession. (Don't forget also that Ostrom is the first female Laureate!).

But this is what makes the Nobel Prize in Economics interesting: there is no good predictor whatsoever on who’s going to win in a given year. You may tip someone to win it within, say x years, or win it someday. But I guess no one have ever made a good fortune in betting on the winner. Kaushik Basu once said, he was tipping his mentor Amartya Sen to win the Prize for five years in a row before he gave up. When Sen did win it in 1998, Basu did’t bet. In the 1990s, almost everyone predicted Paul Krugman will win the Prize. But just when everybody stopped thinking Krugman will win it at all, the Committee awarded him in 2008.

To be honest, I am not a follower of both works, so I won’t be a good reviewer of the decision. But the official Nobel Prize website has written a nice summary of their works (as well as a more elaborated one). What I am interested is what is the message, if any, sent by this year’s award? It’s not that the Nobel Committee has ever taken into account the recent economic situation or discourse in making their decision. However, it’s hard to disagree that the current global crisis has put economic science and profession under the spotlight more than ever. In that case, I am more interested in taking a closer look on who don’t win it.

Prior to the announcement, several names were being tipped as the strongest candidates. One name that has been constantly in the circulation for some years is Chicago’s Eugene Fama. He was referred to as the father of the ‘Efficient Market Hypothesis.’ I do think he deserves the Prize (most likely shared with Kenneth French), based on how influential his work is. But for many reasons, I can see that if he wins it this year, it will spark controversies, even bitter and harsh debates, however unfair it will be.

Another strong candidate was Ernst Fehr. He was well-known for his contributions in behavioral finance, experimental economics, even neuroeconomics – where people see how human makes economic decisions from neuroscience perspective. Fehr, and some other people that may share the Prize like Matthew Rabin, Richard Thaler or Armin Falk, has worked in a field that can somehow be a counter-argument to the efficient market argument. Bounded rationality, cognitive and emotional factors and other things make rationality assumptions are often violated. No one will doubt their significant contributions to economics. However, if the Prize goes to Fehr et al, I can see a wave of ‘I told you so’ attitudes, or even disproportionate attack against the rational agent vis-à-vis efficient market camp.

Well, I may be wrong. Those controversies may not happen at all.

Back to this year’s Prize. If there is any message from the decision, then it would be “Let’s pay more attention to other things apart from the market.” Ostrom and Williamson’s work show that many transactions happen outside of the market: within society or ‘commons’ (Ostrom’s), or firm (Williamson's). True, in many cases market fails to exist or work properly. But even in the absence of the market that is working properly, agents can still coordinate actions that is optimal, and that the government intervention is not always the answer. A closer look on what happens within the mezzo-institution will help us understand ‘what-to-do’ better.

That’s the best I can summarize. Better comments include:

The common theme underlying the prize this year is that markets do not solve all problems of resource allocation and incentives well or even at all. That is not a new idea. What is important is that people and societies find ways through organizational structures and arrangements, political and other institutions, values, incentives and recognition, and the careful management of information, to solve these problems. (Michael Spence).

Issuing the award to these two economists is a welcome trend because it once again leads us to focus on the microeconomic issues that have, when aggregated, macroeconomic consequences. … The joint award to Ostrom and Williamson could be read as a needed corrective on this macroeconomic approach. The common thread that links these two authors together is their concern with mid-size institutions that face serious questions of coordination and control. (Richard Epstein).

… the Nobel selection committee … is expanding the scope of "economic sciences" into the social sciences. That is probably a good thing for several reasons. … I think the point to emphasize is that Elinor Ostrom does great economics at the same time as she does great political science. So does Dan Kahneman. The overlap between the two disciplines is great. (Thomas Schelling).

They show how firms, communities and organizations come to solve these problems absent government regulation and how the choices they make can be disrupted or worsened by bad state policy or sustained by good rules that promote stable property rights and reliable contracts. (John Nye).

Surprising Conversion

No, I am not talking about your barista Aco who, after those years, finally uses Mac. It's Richard Posner, one of the Chicago gang's members, that became (old) Keynesian.

When it comes to macro, it is indeed hard to resist Keynes and his elegant aphorism.

HT: Greg Mankiw

Chicago Strikes Back

By way of a New Keynesian (Greg Mankiw's blog), I learn about John Cochrane's draft of counter attack against Krugman's innuendo.

I like this particular para:

(H)e argues for a future of economics that “recognizes flaws and frictions,” and incorporates alternative assumptions about behavior, especially towards risk-taking. To which I say, “Hello, Paul, where have you been for the last 30 years?” Macroeconomists have not spent 30 years admiring the eternal verities of Kydland and Prescott’s 1982 paper. Pretty much all we have been doing for 30 years is introducing flaws, frictions and new behaviors, especially new models of attitudes to risk, and comparing the resulting models, quantitatively, to data. The long literature on financial crises and banking which Krugman does not mention has also been doing exactly the same.

Which I would also like to shout at emphatically say to our friends the economics no-no (some are within the profession itself) who keep complaining about the lack of behavioural/social interaction/(insert what you want) contents of the discpline,

"Hello, where have you been?"

Addendum:
I recall a conversation with Ujang. He used different words, that is, "ke mana aje, elo?"

Flexible Professor's Wage

What makes economics professors (well, Jim Hamilton, to be precise) different from their non-economics colleagues (to be exact, the other UC's professors)?

The former is more willing to adjust their price and take salary cut (and be explicit about the term, instead of using an obscure word of furlough), when the economy goes bust, and demand for economics teaching and research down.

Of course when thing is the other way around, no difference between the two. Both would love to have a raise.

Kevin Murphy's Example

Here is an interview with one of my favorite economists, Kevin Murphy.

In my opinion, that interview gives you ideas on how economists, ideally, see and think about things. First, find interesting research questions and set it right. Second, stick to positive analysis.

See, for example, the discussion on smoking and drug addiction, and contrast it with the recent discussion amongst FEUI faculties on cigarette; you will find that Murphy never mentions normative statements on the issue --e.g whether smoking is morally a bad thing.

That is the economics as we in cafe salemba know it.

HT: Marginal Revolution

The Pourers of Cold Water and The Clueless Cheerleaders

Sometime ago, Kate the manager asked me why economists are hated. She could not reconcile this fact with her own experience getting along with the baristas in this cafe, who, albeit, in her words, little bit chauvinists, are mostly harmless.

Today she told me that she finally got the answer from her summer reading of George Stigler's Memoirs of an Unregulated Economist. (Please note, with this pick of summer reading, Kate is now officially an econ geek)

Stigler wrote:

Why it has been fashionable to abuse economists (even granting the possibility that they may deserve it)? The main reason is easily named -economists have been the premier "pourers of cold water" on proposals for social improvement, to the despair of the reformers and philanthropist who support these proposals.

Thus, it is small wonder that in the midst of elections when promises of social improvements comes cheap as politicians exploit almost anything -from neoliberalism to, well, neoliberalism -; economists are more hated. Yet, the most depressing part is that many faux economists themselves are engaged in such futile promises, and call them economics. Instead of the pourers of cold water, they are bunch of clueless cheerleaders.

The Best of This Year's April's Fool

is this.

But only if you know some who's who in economics and economic policymaking in the US. And the fact that only economists could laugh out loud at it, while the rest most likely goes "huh?", is actually awkwardly funny by itself.

HT: Alex Tabarrok

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.

So long, Tanta

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

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.

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.

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.

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

Too Good To Be True

Amidst an intense discussion on growth theories, a friend of mine exclaimed,

"I think I know the Solow model better than Solow himself."

Yeah, right.

Wanted: The History of Economic Thought Course

When Dorodjatun Kuntjoro-jakti was appointed as the RI's Ambassador for the US, and later Coordinating Minister for the Economy, I was thinking whether the benefit justifies the loss of the FEUI for not having him teaching The History of Economic Thought. Dorodjatun is always an engaging speaker, and was the best for the course.

In fact, when he was away from the academic, upon hearing that the Faculty was considering to get rid of the course, perhaps due to lack of capable teacher, Aco and yours truly (yes, shamelessly I) had planned to take over and co-teach for the course. Not because I am good at it, but we think the course is too important to be scrapped out from the curriculum.

Fortunately, now Dorodjatun is back to Depok and, I assume, so is the course.

On The History of Economic Thought, Sukasah Syahdan of Akal & Kehendak lamented (liberally translated):

On one hopeful side, there are many young economists who have been and are studying in the UK, US, Australia, and other developed countries to specialize in this science. Yet, economics itself consists of various fields of specialization. Most of the country's economists have had high interest only in the applied and pragmatic side of the science. This is my subjective and non-permanent judgment. Nowadays, not many Indonesian economists are interested in specializing in economic thought; or if they did, only as supplemental trim. Nowadays, the History of Economic Thought is hardly taught in (the universities -my note) in the country. Thee Kian Wie, senior economic historian, to whom I sometime keep in touch with by email, is the only exception today.

Isn't it sad?

Well, it's the catch-22. Those young economists, being trained in mostly mainstream higher education have faced a trade-off between mastering those (bloody, bloody) quantitative approach and techniques to understand those so-called applied and pragmatic side of economics and spending more time reading Politics, Philosophy and Economics (heavy, heavy) textbooks.

Most opt for the former, simply because to survive you need to work on what they demand you to --at least in the first and the second year. By the following years, you'd get the comparative advantage in doing the applied economics and by then there is less reason to work on the economic thought.

But I am still optimistic. Coming from various schools of thought and traditions (either European-North American or Freshwater-Saltwater rivalry), we can expect those new breeds to be engaged in more fruitful public discussion in the near future --not the ones we observe in the media now, between economists and faux economists, or, even worse, amongst those faux economists themselves.

Few of them, I personally know, are real good on the History of Economic Thought and PPE in addition to their superb applied economics analysis.

Whose Job Market?

Among the topics presented on this year’s job market were studies of the prison parole system in Georgia, (several) of HIV/AIDS in Africa , of child immunization in India, of the political bias of newspapers, of child soldiering, of racial profiling, of rain and leisure choices, of mosquito nets, of malaria, of treatment for leukemia, of the stages of child development, of special education, of war and democracy, of the effects of TV coverage on democracy, of bilingualism and democracy, and many others. (Among the leading departments, only Stanford’s graduate students appear to be working almost exclusively on traditional topics.)

The question: whose job market is that? a. criminologist, b. epidemiologist, c. political science, or d. none of them.

Yes, it's none of them. It's the US economist's job market in the year of 2007 --according to Angus Deaton of Princeton in his Letter to The Royal Economy Society of Britain last year.

I'm sure some cynics would give a snort and dub it as an economics imperialism, but I'd say it's cool. Very cool, indeed

HT: Marginal Revolution

The Worst Pick-up Line Ever is

"I hate to sound derivative, but I'd love to lie tangent to your curves."

Warning: apply strictly to the economist only --those dismal scientists.

The line also refers to Greg Mankiw's op-ed that basically says populism likely collides with the standard economics arguments (that includes legalizing marijuana, by the way).

Why? Not because supply and demand is too "complex." It is just not very emotionally satisfying.