Gary Becker's World View -or Something Like That

One feature I like from Chicago political-economy school is their optimistic view on market-like competition and the ability of people to generate it --regardless of any (usually government) attempt to suppress such competition.

Gary Becker interview here is one example. Unlike the right-wing radicals who saw the passing of healthcare bill as a doomsday for America, Becker remains rather optimistic that voters as well as competing interest groups generally would place more realistic assessment and control on this political and politicians' product.

I share his view on the role of interest groups competition - including on the latest Pansus brouhaha.

My favorite lines, however, is his explanation on people's anti-market bias. Becker says at ease:

"There's one bias that we're up against all the time: Markets are hard to appreciate. People tend to impute good motives to government. And if you assume that government officials are well meaning, then you also tend to assume that government officials always act on behalf of the greater good. People understand that entrepreneurs and investors by contrast just try to make money, not act on behalf of the greater good. And they have trouble seeing how this pursuit of profits can lift the general standard of living. The idea is too counterintuitive. So we're always up against a kind of in-built suspicion of markets. There's always a temptation to believe that markets succeed by looting the unfortunate."

Yes, indeed market is hard to appreciate - mostly based on appeal to emotion.

On market, behavioral economics and poverty

In my Facebook note, which have somewhat become the substitute for blogging, we have a productive exchange on, again, market. Specifically, on why most economists believe in the market, what are the limits of the market, and how the economics as a discipline has evolved and integrated the so-called 'non-mainstream' approaches. One of the 'non-mainstream' approaches is the field of behavioral and experimental economics. Basically, they show how the rationality assumption is often violated due to cognitive, emotional, bounded rationality etc.

I just recalled some readings by Harvard's Sendhil Mulianathan that addressed how psychology and behavioral perspectives can help us understand more why rationality assumption often fails, particularly in the context of poverty: this one, this one (with Richard Thaler), and this one (with Marianne Bertand and Eldar Shafir). Those three are basically emphasizing each other. He discussed some cases in which the rational maximization model may not be a very good approximation of human behavior, especially when we talk about poverty: underinvestment in education, undersaving, loss aversion in property rights assignment, misaligned teacher's motivation or low take-out rate of social programs.

I admit that, yes, we have to keep rethinking our epistemological position on rationality and how the market works and doesn't. On the other hand, we as economists do know that market often fails, hence it results in suboptimal outcome. But what we doesn't always know why it fails, let alone what solution should we prescribe. The reason is because "all working markets are alike, every failed markets fails in their own way." Meaning, we need to see things case by case and come up with specific - take a deep breath - policy implication, if any.

So why do we still stick to our mainstream or traditional economic tools? Because it is still a good tool. It enables us to: 1) compare the outcomes when the market works (called the benchmark condition) with the one under market failure, 2) analyze which assumptions are violated, 3) think about what - take a deep breath - policy implication, if any.

Yes, the market works for the poor

In 2005, The Economist published their special reports titled "A Digital Divide." The argument was one of the main reasons for the persistence of poverty is the lack of access to market (goods, labor, or financial). Information and Communication Technology (ICT) has the potential to provide the access to market. The problem is the poor tend to have limited access to such technology. Hence, one way to help alleviating poverty is to provide greater access for the poor to ICT.

A few years ago, this idea did sound absurd. What? Internet or mobile phones for poor farmers or fishermen, while most of them still even struggle to buy food? (Even Rizal once was skeptical. Back in 2005, I asked him how ICT can help the poor. "Sell the computer, buy them rice," was his answer).

However, anecdotal evidences do show that ICT can, and does, help the poor. The Economist's this week special reports provide a series of article - one may see it as a conclusion for their 2005 reports - on how ICT, mobile phone in particular, have transformed lives in the poor world in almost a revolutionary way. It connects buyers and sellers in remote areas; helps small businesses taking orders on the spot; enables farmers to get weather forecast hence deciding whether or not to plant their crops. Amongst all, in India and Africa, mobile phones are the new financial intermediaries:

... mobile money, which allows cash to travel as quickly as a text message. Across the developing world, corner shops are where people buy vouchers to top up their calling credit. Mobile-money services allow these small retailers to act rather like bank branches. They can take your cash, and (by sending a special kind of text message) credit it to your mobile-money account. You can then transfer money (again, via text message) to other registered users, who can withdraw it by visiting their own local corner shops. You can even send money to people who are not registered users; they receive a text message with a code that can be redeemed for cash.

The question is, are anecdotal evidences good evidences? Contemporary studies seem to support the idea. This study is an example. (Of course, there is always a debate on external validity, generalization, etc.)

There is a bigger picture I'd like to point out: this is an example of how market incentives work, and work for the poor. Ten years ago, mobile phones were still a luxury. But in just a decade, costs have fallen dramatically so virtually almost everyone who wants to have a cell phone can have one. Competition and market liberalization has contributed to this falling costs.

On the other hand, (poor) people in the developing world are potential consumers. The market sends this signal to the producers and network providers, who keeps innovating their products. The innovation did not stop there; came Grameen Phone, came M-PESA, and so forth.

So, don't lose faith in the market economy, yet...

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.

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...

Which Rice Price is Which

I am confused.

Some months ago, when the domestic rice price was high --due to shortage--, and the international price low, we didn't want to import because, some said, it would hurt the rice farmers, eventhough when majority net consumers would love to have lower imported rice price.

Now, when the domestic price is low --due to harvest season--, and the international price high, we don't want to export because, some says, it would be good to have large domestic reserve to protect the rice consumers, eventhough at the cost of, well, the rice farmers who may gain for that high international price.

So which one is which --defending the rice farmers or consumers? I am scratching my head.

Meanwhile, if BPS said that in January 2008, in 11 regions the farmer's term of trade increases while the other 11 otherwise, but nationally it goes up by 0.04 percent, can we say that the farmer's purchasing power decline, as that headline's subtitle suggest? Note, too, it was on January when the harvest didn't come yet.

On why the rice price persists high despite harvest time, it's the demand-supply mechanism. The article itself says that the demand increases significantly in Batam, Bangka, Pontianak, and Pekanbaru. Can you guess why? Yes, because international price and demand is high, exporting rice is profitable, and in those area, it is likely easier to sell the rice out. The law of one price, the economist friend would tell you.

If you really want to help rice farmers, what you should do is not to pile up national reserves, but get them more access to international market to outdo the middlemen that you keep blaming on the disparity between consumer and producer rice price. Or in other words, make the rice middlemen services market competitive and let the rice farmers enjoy the high international rice --if you really want to defend them, of course.

Make up your mind, sire

(Anti) Competition Chicken Noodle

Suppose you are a chicken noodle addict and chicken noodle is, well, chicken noodle. They are similar product.

Case #1: There are two chicken noodle sellers in your area, Rizal and AP. Each shares half of total sales, or market share.

OK, it seems like a fair competition.

Case #2: Still in your area, but now there are five sellers, --Rizal, AP, Aco, Ujang, and Sjamsu. Rizal's market share is 96 percent, each of remaining seller shares 1 percent of total market sales.

Are you gonna sue me for anti-competition behavior based on such market share indication?

Recall: what matters is how many chicken noodle sellers that an addict like me you now has (five), not the number of sellers in a whole market, nor its market share.

Case #3: Now, Rizal, AP, Aco, Ujang, and Sjamsu decide to set a chicken noodle cartel.

Does the competition vanish? No, they just shift it from the streets in your neighborhood to a table at cafe salemba where they usually meet up.

Case #4: Rizal is spying your house. He wants to steal your BMW. 

It's politics. Economics has no answer. 

Manado rythm

Looking at a piece of Manado bay from my room up here, at a rather new hotel as one of the outcomes of reclamation at Manado beach, I am amazed. This city had no plan. The additional sixty hectares of land was appended to the then shoreline with no single government's master plan. The initiatives, money and all came from private businessmen, I was told by city officials – proud they sounded. The government was just given sixteen percent of the new land – for a green belt supposedly, which by the way, has yet to be seen.

Ask me not about aesthetics, though. This parade of new malls and office buildings is so eye-torturing. They could have used some coordination to at least make the whole package interesting. Not even close. Bunaken half an hour away out there is way more beautiful. Or, is it just for now? I am amazed and puzzled. No-planning used to sound good to my ears. But if that leads to chaotic structures like this, what is the use? So there I was interviewing people on the street.

And my faith in market was reinstalled: they're just so happy with their new Manado. They don’t give a damn if the look is a no-no. Yes, wealth comes before beauty.

Update: Here is the nice one. Raf, I'll come back (next time, no books, no survey)

iPhone Die-hard's Non-sense

Sometimes people are just very funny.

Imagine this. Yesterday you bought chicken meat in your usual street vendor --you know, the mighty tukang sayur--, for, say, IDR 10,000. This morning, you find out that he sells similar chicken to your neighbor for IDR 4,000. Would you be enraged and ask him to pay the difference?

You might get a bit annoyed, but unless you are insane, you wouldn't ask for compensation. Moreover, you can not blame the tukang sayur for discriminating the price. He never forces you to buy his chicken meat, doesn't he?

Sounds terribly simple? Well, tell that to these outraged Apple buyers upon finding that Steve Jobs has reduced the iPhone price by USD 200 after two months of first sale.

A leftover from UK

For me, the most interesting thing about this year’s Wimbledon apart from Ana Ivanovic of Serbia, is the ticket business. It was reported in the UK newspaper, Daily Mail, that because Amelie Mauresmo literally smacked down Mara Santangelo in (slightly!) less than one hour (i.e. 57 minutes), the organizer, The All England Club, lost almost one million pound sterling. That is because, the rule says if you buy a ticket for a game and that one game is finished in less than an hour, your ticket is fully refunded. Fair enough.

And interesting. If only the result could be predicted beforehand, plenty of economic opportunity could have been exploited by Mauresmo and Santangelo and The AE Club – behind watchers’ back. How? AE could ask M and S to play slightly over one hour – 61 minutes will do. In that case, AE does not have to refund tickets. That means, it could save a million pounds. Then, it could share the saved money with Mauresmo and Santangelo.

But sport is no dirty business, you say. Who knows? (I remember back in the days where we read how enraged Don King whenever Myke Tyson knocked out his opponents in the first round. Yes, then boxing business had an answer to this. It provides a whole lot side entertainments before the main course, just in case the latter lasts only 3 minutes).

The visible hand(set)

Will information and communication technology help the poor? It is tempting to say ‘yes’ to the question. The ‘how’ part is more difficult to explain. Studies on this issue tend to be macroeconomic (an x percent increase of phones or internet per capita is associated with a y percent of income per capita, or the likes).

Others are anecdotal evidence, although doesn’t mean that they are flawed. In a seminar, C.K. Prahalad of the Ross Business School, University of Michigan, mentioned that internet-literate wheat farmers in India examine the world price fluctuation through the Chicago Board of Trade website before deciding how much they should sell to the market. (Our fellow Rizal once said, “How internet helps the poor? Sell the computer, buy them food!)

A forthcoming paper by Robert Jensen (was my advisor at Harvard, now at Brown) provides a deeper analysis. The paper will be published in the Quarterly Journal of Economics next August. A review of the paper is available in the Economist. His work showed that the penetration of mobile phone had increased the average profit of fishermen in Kerala, South India.

At any given day, Kerala’s fishermen have to make a difficult choice: to sell their catch at the local market, or to go to another market along the coast. Whatever the decision is, you need to hope that your fellow fishermen go to the other market so that you would face fewer competitors. This is a one-off decision. Once you come to a certain market, it is almost impossible to move even if the market is full. You need fuel and time to travel. As the result, in a certain market there are plenty of fish that are thrown away (you can not keep the fish). In another market fifteen kilometers away, however, some buyers have to leave the market empty-handed.

This was the situation before 1997. Starting in 1997, mobile phones were available in Kerala. With mobile phones, fishermen were able to call around to find the best price, or to decide to which market they should go while they were still at sea (within 20-25 km from the coast).

The paper was more than just anecdotal. The gradual introduction of mobile phones provided a pseudo-randomization. So the author can divide the population into ‘treatments’ (the early birds) and ‘controls’ (the late comers). The result was very interesting. Once coverage became available in a region, fishermen who ventured beyond their home markets jumped from zero to 35%. The number of excess supply (wasted fish) or excess demand (unlucky buyers) went down to almost zero. Price disparities among markets fell in a typical ‘law of one price’ movement. And, more importantly, fishermen’s profits rose by 8%, and consumer price fell by 4%, on average.

This study provides more insights than that. It shows that the market, when it works, helps the poor instead of exploiting them. True, sometimes the market doesn’t work. The introduction of (information) technology makes the market work. And, beautifully, it was the profit-maximizing mobile phone companies who eventually helped the poor. Not the government, nor charity organizations.