There have been numerous complaints by cellphone users about misleading advertisements. Service providers are racing to attract consumers in a Bertrand price war, using advertisements as attractor. Some ads are extremely dumb.
Should the government take any action on this?
No. Banning false advertising only reflects the belief that the average people, consumer, is stupid. It is as if, as Stigler said, individual consumer can in no way detect fraudulent claims and promises. So he has to be protected from his own incompetence. That's nonsense.
Showing posts with label Freedom. Show all posts
Showing posts with label Freedom. Show all posts
Wednesday, April 09, 2008
Monday, January 28, 2008
On economic freedom
The Manager questioned my loyalty. She sounded disappointed that I posted this there. So here, I repost it here. Hopefully it can save me from a cut in the paycheck.On economic freedom
On the first day of 2007, local newspapers in Indonesia brought a bad news, breaking the Happy New Year celebrations across the country. They ran a headline about a Boeing 737 jetliner that never reached its destination. With it, one hundred people were missing. After two weeks of searching with no avail, families started to loose hope. What they were left with was prayer, to at least see the bodies of their loved ones. Especially when later one fisherman found part of the plane’s tail floating in the Makassar Strait close to the western coast of Sulawesi island.
Winds and storms aside, many people started to blame the accident on competition. Some fifteen years ago Indonesia’s domestic flights meant expensive tickets. Most people traveling across islands in the archipelago opted for sea transportation as they could not afford flying with air planes. Today, nearly everybody can get cheap air ticket. It is so cheap, sea vessels’ customers are shifting from people to big-size containers. Even long distance in-land buses are competing with airlines.
In the wake of the missing air plane, grieves led many to reflect, albeit with misunderstanding, on how they had been enjoying cheap tickets. Thanks to liberalization in the Indonesian airline industry, private airlines started to mushroom. Next was a race to providing the least expensive tickets to win a sizable market share. The carriers, they cut on meals, they printed tickets online, and so forth. But apparently some went even further. Realizing the fact that the safety standards enforcement was rather lame, they started to get loose on safety. Why not use old fleets? Why bother with regular maintenance? Why hire the most qualified pilots? In short, cheap air tickets were made possible not only by some cut on decent meals or some boost in fly frequency, but also by less safety. Enter the premature accusation: competition has caused this entire race to the cheapest tickets. With that, safety is sacrificed. And all they get is accident. (They do not
even bother to look at the ratio of accidents over the fly frequency. It is likely that the ratio gets smaller, given the far busiest air traffic today then ten years ago). In conclusion, competition is evil. Better get the government to fly us, because private simply can not do.
Accidents are saddening. But so is the misunderstanding. It mixes up competition issue and the issue of law enforcement. In the story above, it puts blame on the liberalization of airline industry instead of on the government alleged failure to enforce safety standards regulation. While the two are closely related, they lead to very different policy implications. Solving the competition issue might lead to giving airline business back to the government. Tackling the law enforcement issue will lead to stricter monitoring of how the business is run. True, if effective, both will possibly result in more expensive air ticket, but the causes are different: in the first case it is because the private airlines are no longer able to cut the costs by risking on safety; while in the second case it is due to the monopoly power of the government. History has taught us, the latter case might increase the price higher than the former. Nonetheless the second case is more attractive. Who denies that curbing competition is easier than monitoring it?
Maximizing profits is a form of economic freedom. Given opportunities to raise revenues or to cut costs (or both), a firm would be stupid not to use them. Ethics aside, this includes an opportunity to play around rules, should there be a room. In the absence of competition, the incentive to find all opportunities to maximize profits is rare. Rather, it is the monopolistic power that is used to do the task. But (non-natural) monopoly denies the freedom of others to engage in business. Worse yet, it denies the freedom of consumers to access more choices and lower prices. Competition therefore has a lot to do with freedom.
However, freedom does not mean anarchy. They are starkly different. The former requires rules of the game, the latter not. This is where people tend to mix things up, as illustrated above. When problem arises, is it a problem of competition i.e. freedom or is it a problem of law enforcement? You can not really put and enforce standards on ethics, but you can put and enforce standards on safety. This is why and where we need the government. That is, to make sure that rules are in order. Alas, many times inability to enforce rules leads the government to do other things, including running the business itself and/or curbing competition. Authority to guard rules also brings another problem: the incentive to over-regulate. Sometime governments establish rules only as a vehicle to abuse their power. Another time, they simply put (good) rules in a wrong place. Requiring seat belt in cars and setting age standard for air carriers might sound similar as far as policy objectives are considered. But they are different: you can see if the car you are about to get in has a seat belt attached or not. But you can not know the condition of the air plane you are about to board in. In the former case, there is no need for the government to step in, but in the second case, there is: to make sure that the plane is safe for you and other passengers. In the first case both you and the car owner/seller know that the car is seat-belt-less. Here the market can work well, as indicated by the resulting price. In the second case, the information is asymmetric. The airline knows exactly how old its plane is; you, most likely, do not. The government helps to ensure that the information reaches you, so the market can work as properly.
Friday, February 09, 2007
Flood Rescue Strategy: Saving X or Y?
It seems that the flood has been receded. It is now somewhat safe to launch a slightly provocative quiz on the subject. Here it is.
Assume:
There are two types of area that has been submerged by flood in a city, X and Y. X is located in a riverbank and inhabited by low-income people, the ones who can only afford the cheaper almost-like-slum housing by the river. They get used to, and are better prepared to, annual flood. Yet, once the flood hit like this year, they have to face higher level of water, and danger, coming into their way. Despite little grumbling, they still can smile --as seen on TV.
Y area, on the other hand, has never been inundated, except this year. The population is relatively well-off people, middle class who can afford suburban housing in, supposedly, flood free residential area. By that, understandably it was really desperately shocking for them, unprepared as they were, to see the water swallowed their properties. When the shock ceased, they enraged, blamed the authority --any authority--, and some of them started to take legal action against the city government --as read in newspapers headlines.
Problem:
You are the city administrator in charge for rescue scheme. You are, however, only equipped with limited resources --personnels, money, boats, etc-- to be deployed, that doesn't allow you to cover both areas. Now, which area that you are going to intervene, X or Y?
To make things more complicated, your boss, the elected official, called you up. He wanted to make sure that the disaster would not obstruct his chance for running in the next election for his second term.
And your answer, please? And why?
The best answer will be awarded free coffee and cheesecake, specially prepared by Manager. She hates the flood, it reduces the cafe revenue.
p/s: This quiz is a modification of Amartya Sen's illustration on the problem of informational base for evaluative judgments and the theories of justice and social ethics, in his book Development as Freedom, page54-56.
Added
You may want to replace the flood with sharp rise of poverty level right after a massive economic crisis; people in X the chronic poor; people in Y new social climbers who just managed to escape the damned poverty line, --thanks for recent economic boom--, but are hardly too far away from it yet; and the call from your boss a democracy. And instead of a flood rescue plan, it's a poverty alleviation program.
Of course, the prize of a sensible answer will be increased accordingly. Perhaps, a ticket for Java Jazz would do, Manager?
social ethics | policy trade-off
Assume:
There are two types of area that has been submerged by flood in a city, X and Y. X is located in a riverbank and inhabited by low-income people, the ones who can only afford the cheaper almost-like-slum housing by the river. They get used to, and are better prepared to, annual flood. Yet, once the flood hit like this year, they have to face higher level of water, and danger, coming into their way. Despite little grumbling, they still can smile --as seen on TV.
Y area, on the other hand, has never been inundated, except this year. The population is relatively well-off people, middle class who can afford suburban housing in, supposedly, flood free residential area. By that, understandably it was really desperately shocking for them, unprepared as they were, to see the water swallowed their properties. When the shock ceased, they enraged, blamed the authority --any authority--, and some of them started to take legal action against the city government --as read in newspapers headlines.
Problem:
You are the city administrator in charge for rescue scheme. You are, however, only equipped with limited resources --personnels, money, boats, etc-- to be deployed, that doesn't allow you to cover both areas. Now, which area that you are going to intervene, X or Y?
To make things more complicated, your boss, the elected official, called you up. He wanted to make sure that the disaster would not obstruct his chance for running in the next election for his second term.
And your answer, please? And why?
The best answer will be awarded free coffee and cheesecake, specially prepared by Manager. She hates the flood, it reduces the cafe revenue.
p/s: This quiz is a modification of Amartya Sen's illustration on the problem of informational base for evaluative judgments and the theories of justice and social ethics, in his book Development as Freedom, page54-56.
Added
You may want to replace the flood with sharp rise of poverty level right after a massive economic crisis; people in X the chronic poor; people in Y new social climbers who just managed to escape the damned poverty line, --thanks for recent economic boom--, but are hardly too far away from it yet; and the call from your boss a democracy. And instead of a flood rescue plan, it's a poverty alleviation program.
Of course, the prize of a sensible answer will be increased accordingly. Perhaps, a ticket for Java Jazz would do, Manager?
social ethics | policy trade-off
Wednesday, September 13, 2006
The 2006 Economic Freedom Index
Let me begin by reporting that Aco had just stolen the show of the 2006 Conference of the Economic Freedom Network Asia in Kuala Lumpur. By arguing that Free Trade Areas or Preferential Trade Areas are basically an impediment for the real free trade, he was crowned as the true liberal in the forum of Asian liberals. OK, I am exaggerating. There was no crowning ceremony. But at least, in the forum Aco was called an (liberal) activist. Not only liberal economist, but activist...
Also in the conference was the launching of the 2006 Economic Freedom of the World Report and Index. According to its official publication, the Economic Freedom Index was based on Milton Friedman's concept of economic freedom:
[it] measures the degree to which the policies and institutions of countries are supportive of economic freedom. The cornerstones of economic freedom are personal choice, voluntary exchange, freedom to compete, and security of privately owned property. Thirty-eight data points are used to construct a summary index and to measure the degree of economic freedom in five areas: (1) size of government; (2) legal structure and security of property rights; (3) access to sound money; (4) freedom to trade internationally; and (5) regulation of credit, labour and business.
One hundred and thirty eight countries was surveyed in the 2006 publication (the 2006 report publishes the data in 2004). The index takes value of zero to ten; zero means completely unfree, and ten means completely free. The overall index is based on 38 data points measuring the five components. In each component, each country also received the 0-10 score. The index is constructed from various secondary data. So it is not a direct survey of perception or a panel expert.
As the other indices (Human Development Index, Freedom House Political and Civil Liverty, Polity Index of Democratization, even Consumer Price Index), of course the Economic Freedom Index may suffer from the typical problems: measurement error, construction, defintion, level of aggregation etc. But still, it is worth having it as a quantitative measurement of quality of economic institution. The thing is, we need to be cautious in interpreting the data and translating into policy action. But let's just have fun and see what it says.
Hong Kong and Singapore are the two most free economies in the world, followed by Switzerland, New Zealand and the United States. Venezuela, two Congos, Myanmar and Zimbabwe are in the bottom five. Although Hong Kong and Singapore tops the overall score, they are not always the first in each categories. For example, El Savador ranks first in the 'government size' category; Denmark in the 'legal system and property rights'; Sweden (access to sound money) and Iceland (regulatory).
Taking a cross-country analysis, the Economic Freedom Index score is positively correlated with Human Development Index, life expectancy, income level of the poorest 10%, environmental quality and access to improved water sources. Meanwhile, it is negatively correlated with infant mortality, unemployment, share of children in the labor force and corruption. Of course, we can't imply anything from this correlation because it suffers from the usual reverse causality and omitted variable problems. But these simple correlations can at least challenge a popular perception: that liberalizing the economy is bad for the poor and quality of life in general.
Generally, countries with better EF Index also score better in the Freedom House' civil and political liberties. But we may see countries like Singapore, United Arab Emirates or Kuwait who are under the 'partially or totally unfree' politically score well in the EF Index. (We can also add Hong Kong in the list if we consider it is part of China now.) However, those who economically are not free are consistently not free politically. Note that we are still unable to answer what causes what. Whether economic freedom causes political freedom or vice versa, or nothing causes anything, is still an open field to disagree.
What about Indonesia?
The country's overall score in 2004 is 6.0 -- it ranks 83 out of 132 countries in the survey. Lower than Malaysia, Thailand, the Philippines, even Egypt and Iran (!). Well, at least Indonesia ranks better than the likes of Vietnam, Brazil, Turkey or Fiji.
The country's score in 2004 is lower than that in 2003, in which it ranked 73. Breaking down by components, the country's government size score is not different from that in 1985, the period when Indonesia just started the deregulation (and worse, means bigger, than that in 1990-2000). Regulation quality score is worse compared to 1990, and virtually unchanged during the 2000s. Legal system and property rights is also worse than that in 1985, 1990 and 2003 (although higher than that in 2000 -- if that's something to cheer about). The country also scores lower in the access to sound money category compared with 1985-90. Although in terms of freedom to trade internationally, the situation in 2004 is much better than in 1985-90, althogh worse than that in 2000.
So who says that our economy is getting freer and more liberal?
Economic Freedom Index
Also in the conference was the launching of the 2006 Economic Freedom of the World Report and Index. According to its official publication, the Economic Freedom Index was based on Milton Friedman's concept of economic freedom:
[it] measures the degree to which the policies and institutions of countries are supportive of economic freedom. The cornerstones of economic freedom are personal choice, voluntary exchange, freedom to compete, and security of privately owned property. Thirty-eight data points are used to construct a summary index and to measure the degree of economic freedom in five areas: (1) size of government; (2) legal structure and security of property rights; (3) access to sound money; (4) freedom to trade internationally; and (5) regulation of credit, labour and business.
One hundred and thirty eight countries was surveyed in the 2006 publication (the 2006 report publishes the data in 2004). The index takes value of zero to ten; zero means completely unfree, and ten means completely free. The overall index is based on 38 data points measuring the five components. In each component, each country also received the 0-10 score. The index is constructed from various secondary data. So it is not a direct survey of perception or a panel expert.
As the other indices (Human Development Index, Freedom House Political and Civil Liverty, Polity Index of Democratization, even Consumer Price Index), of course the Economic Freedom Index may suffer from the typical problems: measurement error, construction, defintion, level of aggregation etc. But still, it is worth having it as a quantitative measurement of quality of economic institution. The thing is, we need to be cautious in interpreting the data and translating into policy action. But let's just have fun and see what it says.
Hong Kong and Singapore are the two most free economies in the world, followed by Switzerland, New Zealand and the United States. Venezuela, two Congos, Myanmar and Zimbabwe are in the bottom five. Although Hong Kong and Singapore tops the overall score, they are not always the first in each categories. For example, El Savador ranks first in the 'government size' category; Denmark in the 'legal system and property rights'; Sweden (access to sound money) and Iceland (regulatory).
Taking a cross-country analysis, the Economic Freedom Index score is positively correlated with Human Development Index, life expectancy, income level of the poorest 10%, environmental quality and access to improved water sources. Meanwhile, it is negatively correlated with infant mortality, unemployment, share of children in the labor force and corruption. Of course, we can't imply anything from this correlation because it suffers from the usual reverse causality and omitted variable problems. But these simple correlations can at least challenge a popular perception: that liberalizing the economy is bad for the poor and quality of life in general.
Generally, countries with better EF Index also score better in the Freedom House' civil and political liberties. But we may see countries like Singapore, United Arab Emirates or Kuwait who are under the 'partially or totally unfree' politically score well in the EF Index. (We can also add Hong Kong in the list if we consider it is part of China now.) However, those who economically are not free are consistently not free politically. Note that we are still unable to answer what causes what. Whether economic freedom causes political freedom or vice versa, or nothing causes anything, is still an open field to disagree.
What about Indonesia?
The country's overall score in 2004 is 6.0 -- it ranks 83 out of 132 countries in the survey. Lower than Malaysia, Thailand, the Philippines, even Egypt and Iran (!). Well, at least Indonesia ranks better than the likes of Vietnam, Brazil, Turkey or Fiji.
The country's score in 2004 is lower than that in 2003, in which it ranked 73. Breaking down by components, the country's government size score is not different from that in 1985, the period when Indonesia just started the deregulation (and worse, means bigger, than that in 1990-2000). Regulation quality score is worse compared to 1990, and virtually unchanged during the 2000s. Legal system and property rights is also worse than that in 1985, 1990 and 2003 (although higher than that in 2000 -- if that's something to cheer about). The country also scores lower in the access to sound money category compared with 1985-90. Although in terms of freedom to trade internationally, the situation in 2004 is much better than in 1985-90, althogh worse than that in 2000.
So who says that our economy is getting freer and more liberal?
Economic Freedom Index
Monday, May 08, 2006
Kedai Kebebasan
Café Salemba welcomes Kedai Kebebasan (literally, Freedom Café). Need more like this.
Wednesday, March 01, 2006
Ask... what... to your country?
Nationalists often quote this JFK's famous phrase, "Ask not what your country can do for you. Ask what you can do for your country."
But libertarians consider this quote as immoral, even fascistic, on the basis that the country (or state or government) should not tell what free individuals should do. Read Milton Friedman's opening remarks in 'Capitalism and Freedom.' Another Friedman, Milton's son David, went further in his 'Guide to Radical Capitalism' by declaring, "Ask not what your country can do for you. Ask what it can't." The basis of his statement is of course the concept of negative freedom.
Proponents of welfare state also disagree on the "Ask not what your country can do" part. Instead, they would say, "Ask what you country must do," on the basis that the country (state or government) has certain inherent obligations to its citizens. (Ironically, in the US political tradition, they are the ones called 'liberals').
For development and institutional economists, the correct question will be "Ask what your country should do, and make sure it does it correctly; and ask what your country should not do, not on the basis of ideology but on the basis of efficiency and opportunity cost principles."
Economic philosophy
But libertarians consider this quote as immoral, even fascistic, on the basis that the country (or state or government) should not tell what free individuals should do. Read Milton Friedman's opening remarks in 'Capitalism and Freedom.' Another Friedman, Milton's son David, went further in his 'Guide to Radical Capitalism' by declaring, "Ask not what your country can do for you. Ask what it can't." The basis of his statement is of course the concept of negative freedom.
Proponents of welfare state also disagree on the "Ask not what your country can do" part. Instead, they would say, "Ask what you country must do," on the basis that the country (state or government) has certain inherent obligations to its citizens. (Ironically, in the US political tradition, they are the ones called 'liberals').
For development and institutional economists, the correct question will be "Ask what your country should do, and make sure it does it correctly; and ask what your country should not do, not on the basis of ideology but on the basis of efficiency and opportunity cost principles."
Economic philosophy
Monday, November 07, 2005
Friedman's paradox?
In “Capitalism and Freedom (1962),” Friedman discussed property rights mainly in the context of the limited role of government. He argued that the justification that the government may exist is that it has a role in defining and protecting property rights. Yet, he did not explicitly discuss or make any arguments about the basis of property rights claim by an individual. The only explicit argument that he made was “the existence of a well specified and generally accepted definition of property is far more important than just what the definition is (p.27).”
One thing we can infer from this argument is that property rights is basically a constructed definition that is generally accepted. But at the same time, he also argued that it is the role of the government to make such definition. Corollary, in Friedman’s view, government is the only source of property rights.
I found this position quite problematic. The whole point of Friedman’s argument in “Capitalism and Freedom” is about how the government is merely a tool to serve individuals’ interests. This means, individuals exist before any forms of government. That should imply that before there was government, there have already been property rights. But this contradicts the earlier statement that defining property rights is the role of government.
Anyone has an idea on explaining this paradox?
One thing we can infer from this argument is that property rights is basically a constructed definition that is generally accepted. But at the same time, he also argued that it is the role of the government to make such definition. Corollary, in Friedman’s view, government is the only source of property rights.
I found this position quite problematic. The whole point of Friedman’s argument in “Capitalism and Freedom” is about how the government is merely a tool to serve individuals’ interests. This means, individuals exist before any forms of government. That should imply that before there was government, there have already been property rights. But this contradicts the earlier statement that defining property rights is the role of government.
Anyone has an idea on explaining this paradox?
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