Weird iPhone

I can tell that iPhone is indeed a damn cool gadget. But to take it home with you, and use it, you need to subscribe to AT&T for a 2 years plan. Until now, it can't work on other network.

This is actually a weird arrangement, that is, limiting your users coverage, but it turns out that:

...Apple gets $3 a month for every existing AT&T subscriber who has bought an iPhone and $11 a month for every new customer. That looks like about $150 per user for Apple, on top of the margin on the phone itself. So although Apple can make money selling iPhones to anyone, the company gets considerably more if it drives those users to AT&T. Which is what it is doing...(from John Naughton of the Guardian website)

I dislike the idea for a personal motive: AT&T's is not the cheapest plan. But I can not blame Apple to sign the contract with them. Apple has the right to do so.

So does the consumer to unlock the machine and use cheaper network, I must say.

But, alas, AT&T lawyer seems ready to bring you to the court, preventing that unlocking business. The law, so far, doesn't say anything yet on this matter. But if the law rules against unlocking iPhone, as Naughton wrote in that column, the law is an ass.

By the way, unlocking iPhone would not be a problem in Mangga Dua, would it? Has anyone tried it?

Show some respect, please!

A banner in my neighborhood asked people to “respect those who are fasting” ("hormatilah orang yang berpuasa"). I tried to think, what is ‘respecting those who are fasting’? In my childhood, I was taught that it simply means not eating or drinking in front of people who fast. Perhaps if I someone who fasts sees me enjoying my meals, he or she will get tempted to break the fast.

But then, refraining yourself from eating and drinking (and smoking and having sexual relationship) during the day is the essence of fasting, isn’t it? Giving up one’s utility from eating and drinking is and individual choice. Then, respecting those who fast is a matter of respecting property rights and personal choice. When it’s a personal choice, no one is justified to force them to eat or drink during the day (or tease them or humiliate them).

Similarly, it’s an individual choice not to fast. And the non-fasting people also have the rights to remain eating, smoking or drinking. No one is justified to ask them to stop, in the name of ‘respecting the fast.’ And during the night, whether one was fasting in the day or not, one has the right to spend the night in café or pubs. The café or restaurant owners have the right to do keep their business open at any time. Nobody has any justifications to prevent anyone to go to restaurants at any time. Nobody possesses the right to force restaurants, pubs or cafes to close at any time. (Unless, of course, if the pubs create noise that prevent one from sleeping.)

The rights to perform fasting as a religious duty include the rights to tell others that it is already time to start fasting when they are OK to be told (or when they asked you to do so). Similarly, people have also the rights to remain sleeping and not being disturbed by ‘wake up calls’ from masjids or minutemen. Hence, in my opinion, those shouting ‘sahur… sahur…’ using megaphone from masjids are abusing own’s right, and violating other’s property rights. The solution is simple: use alarm clock, telephone, or if it necessary, put a sign in front of your house that you want to be waken up.

Another obvious thing, whether fasting or not, we do have the rights for a ‘petasan’ (explosives)-free environment. If we ever need the government during this Ramadhan month, it is to regulate petasan and noise from masjids. Not closing down business or night lives.

Back to the banner in my neighborhood. Usually, a banner is a signal of something. What does it possibly mean?

One, those who fast felt that they are not respected enough. Two, those who don’t fast have given enough respect, but those who do ask to be more respected. Three, it signals a kind of threat: respect us, or else…


Religion | Ramadhan

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

Property rights, neglected

(Before you get bored, read the last two paragraphs first)

One thing that's so challenging everytime we start talking about public economics (i.e. economics that involves you, me, them, and the government simultaneously -- ahem, looks like everything is public economics, no?) is the issue of property rights. Sadly, it is almost always taken as a cursory note. It might even be just a cameo in econ classes. Despite the fact that the issue of property rights is a key pillar in economics.

Here's an example.

Imagine you buy a gold in whatever form. You keep it at home as a "store of value". Due to high uncertainty in other form of investment (money, stocks, bonds, etc), you decide to keep it and sell it when "price is damn good". Question: are you committing a crime? Of course not (I know you're raising your eyebrow).

But now, try this thought experiment. Change the word "gold" into "rice". Does our conclusion still hold?

Apparently, not to one of my students. She said that when you stored rice and waited until the price was high before you sold it, you're "immoral". I asked her what's the difference with gold. She quickly responded: "You don't eat gold, you eat rice". So the nature of property depends on whether or not you "eat" it, eh?

That's a total neglect of the concept of "property right". And it's not unique to the student above. The same way of thinking is pervasive even in the House of Representatives and in the government. I heard, some lawmakers start thinking of punishing "rice speculators" -- those who buy rice in bulk, keep it, and sell when the price is high.

Property right, in plain words, is the right to do anything the beholder wants with regards to the property. When I bought this laptop, what I actually paid was the right to do anything I want to it. As per the transaction, the right was transferred from the IBM store to me. Next thing I knew, I could use this laptop to blog, to write, to calculate, you name it. But don't forget, I could also use it for other purposes I want. For example, when I got threatened by some jerk on the street, I could throw this laptop on his face, as a defense. I could even ... burn it, if I want. And IBM store has no right to complain. Neither does the parliament member, nor the government.

So, if you want to punish "rice speculators", you've got to be fair. Punish gold "speculators", laptop "speculators", car "speculators", et cetera.

Note however, two caveats:

One, when the government acts as "rice speculators", the above qualification might not hold. Why? Because it speculates using our money, not their own. When Bulog buys rice, some of the money they use come from our tax. Meaning, the people own part of the property right. The government cq Bulog is therefore subject to the people's consent.

Two, be very clear on the difference between the rice "speculation" story above and the practice of illegal mixing of fuel and kerosene ("oplosan"). When I buy lots of fuel, I own the property right of it. When I buy lots of kerosene, same story applies as well. I have all the right to do anything on those two "properties", including mixing them up. But, when I sell the mixed substance to the public as if it is fuel (not mixed with kerosene) at the fuel price (be it market or administered), I am committing a crime. I have to be punished for that. Because I lie to buyers -- if you know that my fuel contains kerosene, yet I sell it at the same price with un-kerosene-d fuel, there's no reason for you to buy it from me. (The story will be more complicated when I sell the mixed thing at a price lower than fuel's price but higher than kerosene's price, then I transact with you voluntarily and with perfect information; but let's save this for other posting; for now, let's think before calling it a crime).

Having said all that, let me go back to your favourite issue: Playboy magazine. I deliberately offered the "anti" camp an economic solution, namely: buy the magazine, and burn it. Now you see what I meant. When you buy the magazine, you have all the right to do anything on it. So it's perfectly legal for you to ... burn it. But you can't burn somebody else's magazine -- he (or she) has the right to keep it; he pays for it. (Note: the argument here does not hold for the case of, for example, bibles. What constitutes "property" in the case of bible is not the book in its physical form. It's the ideas that have become publicly owned. It's the religion. And the owner of a religion is of course the believer of the religion. The only private part of the bible is the production process of printing it, and the right to keep it at home. The content, on the other hand, is a public good. Burning a bible, therefore, means an offense to the "property owners": the believers).

(Quizz: Ape and Dewa (see comments in the foregoing posting) suggest to the anti camp not to buy Playboy magazine. I suggest otherwise. Why?)

De Soto's solution for Australia

In its recent edition, 'The Economist' published a story from the Down Under about a proposal to give the Aborigins private title on communal lands. This proposal was raised by an indigenous Australian, who is very lucky enough to have a law degree from Sydney University.

This Hernando De Soto's type of proposal, in my opinion, is worth delivering. If we want to help indigenous people, settling them in preservation areas, and give them money in the forms of 'public welfare programsm,' won't work. Well, it indeed had not worked for all these years. So the best way is to integrate them into the market economy. Provide them with private property rights, in this case private land titles, is the first step.

Too bad, somehow this proposal was not too popular, even among the indigenous people.

Strange root, young French wine, and Tiger penis

Sorry for being passive for the last week. I decided to take a bed from this blog because of work. Now let me get back at you folks with some story telling.

A week ago an auction sold a giant truffle, a rare delicacy, for about than 40,000 USD/pound. For those who are not familiar with this wild root, this item is chic enough to drive restauranteur and executive chefs from restaurants such as New York's Union Pacific to California's French Laundry crazy. Looking somewhat similar like a potato yet slightly pungent in aroma, ordering a salad-du-jour sprinkled with truffle, a splash of cold pressed extra virgin olive oil, and Parmigiano-reggiano cheese can asymptotically transform your average appearance to a regular bloke in the discontinued trans-Atlantic Concorde flight.

Exit straight East. Last Thursday, Japanese consumers were to be the 2nd largest consumers of Beaujolais-Nouveau, a young French wine, in the world. By law, this type of French wine can only be consume simultaneously on the 3rd Thursday regardless where you live. Apparently it has become a ritual race to serve wine fanatics around the globe on Thursday early midnight. For the last month, unnoticed mammoth logistical operation had taken place to transport millions of bottles around the world, from Lyons to Tokyo, Singapore, Jakarta, as well as the cafetaria of my workplace.

Move westward. China. One billion people with excess appetite for endangered species parts from turtle, monkey brain, shark’s fin, bear claw, and tiger penis. Some consume because their belief in the healing power of those delicacies and some are just plainly hungry for new yet sometimes raw adventure. Tiger penis’ soup in fact are priced according to how many times that poor animal meat has been used. The first "boil" is supposed to be the most expensive.

Let us all not be deceived. My point in each illustration is that there is an immense value created from the production, transaction, and delivery processes of each good/services.

Back to last month posting by AP on Friedman paradox (government role to protect property rights vs. to serve individual interest). I do not intend to answer your posting directly.

But what I do intend is for us to imagine how would it be if none of us has the right to legally defend our idea and our possession. Imagine a world without governance, without any legal protection whatsoever for your ideas and possessions. Then truffle would be cultivated by savage tribes; auctioneer will be likely found dead before even announcing the winner; and executive chefs can be kidnapped and force to work for any restaurant run by gangster. Not to mention resources spend on arming yourself and your family against looters. Red wine ? No Japanese will be able to consume because the shipment will not likely to pass even 5 km from Lyon. The UPS driver is likely to be lynched by mob who are desperate to possess the wine at the same time forgetting that no value can be created if there demand is suppressed at the other end. Tiger penis? Except Chinese royals or communist party officials, average bloke like us can’t get access to that rare thingy, hence “consumer surplus” evaporates (Don't get me wrong, I'm not advocating to eat /hunt down tigers. I believe this is an endagered species and its extinction is worse for all of us)

Thus IMHO an institution (or an agent zero as said in the infamous Mascolell et.al) that can credibly facilitate an efficient and secure bargaining process is needed if parties are interested in achieving optimal bargaining outcome. Othewise, as characterized by the Nash bargaining problem, short-sighted, short-tempered, ill-informed parties have less likelihood to achieve greater outcome and more likely to get the trheat value (low equilibrium).

...Mmmmm...... we need a government ?

Does culture matter for growth? (2)

Following my previous posting, culture may influence economic development indirectly through another channel. Shulz and Williamson (2003) argued that the channel is financial and commercial institutions. The authors argue that the reason for relatively poorer performance of Catholic economies was because the incompatibility of institutions in Catholic countries with modern capitalism. For example, the medieval church regarded charging interest as a kind of economic transaction where “one of the parties would not be taking advantage of the other because of greater bargaining strength,” hence they tended to restrict interest. On the other hand, the (Calvinist) Protestants “viewed the payment of interest as a normal part of commerce, thereby making it possible for modern debt markets to develop.”

Catholic and Protestant countries also differed in their attitudes towards protection of creditors’ rights. The authors found that countries which main religion is Catholic tend to protect the right of creditors less than the Protestant countries. Catholic Church regarded private property and economic as subject to the good of society. That implies that some to a certain degree private property is a ‘common goods.’ However, the Church has an authority to define what goods considered as ‘common.’

On the other hand, as the authors argued, Protestantism reform led to a better protection for creditors because of the philosophy that:

Individuals were responsible for their actions and that they had to live up to the contracts they entered into of their own free will … there was no role for higher legal or religious authorities to step in and change contract terms for the good of society or for laws to be approved that would hinder individuals from entering contracts.

Consequently, according to the authors, protection to private property was higher in Protestant countries because the definition of the common good is passed down to the individual members rather than decided by a centralized power of Church.

The lack of compatibility to modern capitalist institution was also the reason for underdevelopment in the Middle Eastern Islamic world. This is the main point of a study by Timur Kuran (2003). According to Kuran, there were two main issues with the Islamic commercial institutions. First, the Islamic business partnership law came in a package with the inheritance law that provides a mandatory inheritance shares to all sons and daughters. While this kind of partnership was well suited the medieval economy in which it developed, it raised the costs of dissolving a partnership following a partner’s death. This has kept Middle Eastern commercial enterprises small and short-lived. Second, on the contrary with the Islamic system, European inheritance systems facilitated large and durable partnerships by reducing the likelihood of premature dissolution. As the result, European enterprises grew larger than those of the Islamic world.

The two studies above offered an alternative view on the role of culture in economic development. Culture, specifically religious norms, shape institutions. And the commercial institutions affect economic performance. Analyzing institution as the channel through which culture affect the economy can strengthen the argument that culture matters for economic development. However, there is still room to argue whether culture is the only variable, or the most important one, that explains how institutions were shaped. Such approach also can not explain what makes culture change, and how it changes overtime.

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?