On the role and limit of community

If I were a newspaper journalist, writing a story on the Nobel Prize winners should not be a difficult job. Just translate and rephrase the 5-page public information prepared by the committee, which has neatly summarized the contribution of the Laureates. Unless if you had a prior ‘agenda’ in your mind; e.g. attacking mainstream economics cum economists cum global capitalism. Then you risk writing something that has no connection between the report and your conclusion.

My favorite newspaper provided a good example on how a single paragraph had successfully driven the article way out of context:

The economic collapse caused by the crisis was a blow to the Nobel Committee’s credibility. The public has seen how economic theories, which have been developed by economists and brought them previous Nobel awards, were proven ineffective, leading to the global economic catastrophe.

Surely, if the ‘reporter’ has spent some time in researching previous awards, he or she may have understood that a significant portion of the awards were given to economists who have devoted their career to show how market can fail. Moreover, although Ostrom and Williamson’s work was about non-market transaction, it is misleading to conclude that non-market transaction is a solution to the market at anytime and any place.

Remember, also, that the Nobel Prize in Economics is awarded to studies that have made significant contributions over the past two or three decades. That means, there is a 2-3 decades lag between the time the theories were developed and the Prize. During the period, many studies have followed the original works. So it doesn’t mean that this year’s Nobel marks a significant U-turn in the economic discipline.

One particular area is how communities can solve the coordination and allocation problem in the absence of working market – Ostrom’s contribution. In the past two decades, there have been a significant number of economic papers that studied this issue. I summarized some of them in this note.

In addition to that, I’d also want to point out some interesting papers written by MIT’s Ben Olken. Here he showed that higher level of ‘civic participation’ in the village is not associated with lower village corruption, contrary to the standard theory of social capital. In another paper he argued that, external monitoring (for example, audit by a government agency), is still more effective in minimizing corruption of local public expenditure compared to monitoring by community.

In this work in progress (co-authored with others), he showed that in identifying who are the poor in a community, full community-based targeting is no more dominant than the top-down approach. However, a combination of the two provides the best result. Then, in another paper, he concluded that higher level of civic participation in local political decision making has little effect on actual decisions. However, the inclusive process in itself can substantially increase satisfaction and legitimacy.

The bottom line is, while the role of community should be appreciated more and paid greater attention in economic works, we also need to understand the limit of community in solving the problem of allocation and coordination. No need to say, we should be very careful before making inferences on the relations of Ostrom’s works and the solution to the economic crisis.

Note: all Ben’s works above are using Indonesian cases.

Network and Inequality

And now our sociologist friend, Roby shows us that inequality can be a manifestation more of network effect than of prejudice (or discrimination for that matter)...

-- Manager

Network and Inequality
by Roby

An asset-management company has this problem:

The business of asset-management companies is to attract rich individuals to give up their money so they can be managed by these companies. The sales people rely on their own social networks to access these high net worth individuals; and they are compensated based on how much money they can bring to the company.

A problem arises when there is an allegation that the company implements a disriminatory practice in its compensation structure. The company has several Blacks in its sales group and their earnings are consistently lower than their White counterparts. Thus, the company is accused of discrimination, and furthermore this case has been exemplified as a discrimination practice that is rampant in the corporate world and responsible for the high income inequality
between Blacks and Whites.

The argument here is that discrimination - with respect to racial prejudice in this case - is the main cause of inequality.

If we take a closer look, however, we will find out that those Black employee come from lower Social Economic Status (SES) than their White colleagues. Since SES affects one's social network greatly (rich people know more rich people than poor people and vice versa), interactions between people within the same SES groups are more likely than interactions across SES groups.

What happen is that the compensation (incentive) structure only reveals the underlying social structure. Therefore, in this case, the inequality stems as a network effect; not as a form of discrimination.

There are two important points here. First, inequality can be a network effect that has less to do with individual prejudice or preference. Second, it is important to pay serious attention to the
relevant social structure in designing an incentive structure since disregarding social structure completely can lead to unintended and undesired consequences as illustrated in this case.

Microfinance, anyone?

Social networks or social capital is one of the topics have been discussed in this Cafe (even debated among its barristers). It is a topic that has been of a growing interest of some economists. Harvard's Economic Department even offers a course devoted specifically to this issue.

Roby, a sociologist, regular visitor of this Cafe, as well as close friend of the barristers, can be considered as the authority of this field. He sent us this piece about microfinance as a potential intersection for social scientists to study more about mechanism design problem. Although it is not the first time that microfinance is being discussed in the context of social network (this is one example, or here is a list of more serious stuffs), still it is interesting to see Roby's challenge will be answered in the Indonesian context.

Microfinance, anyone?
by Roby

I am one of the fans of this blog but so far I only contribute by writing rather negative comments. In this post I want to share something positive.

As you may know, I am not an economist but some of my colleagues here are economists or working on topics that are also of interest for economists. I must say that I like economics but can't stomach some economists especially when they start to pretend to understand something and come up with "explanations" that actually don't explain anything. Having said that, I do think economists have succeeded in creating some useful arsenals and insights to understand human behavior.

Recently my boss left his tenured position to join the microeconomic research group of a leading web company. Since his departure, I regularly come to his new office and meet a lot of interesting people with different background, including economists. I try to know more about the kinds of interdisciplinary work where computer scientists, physicists, mathematicians, economists, psychologists and sociologist are working together.

Social scientists and economists are hired by major internet firms to help those firms to understand user behavior, from buying or selling products to hanging out in social networking sites. Armed with the understanding, these firms hope they can find better ways to monetize the services they offer through their websites. From the scientific point of view, access to huge data of human interactions and relatively "unlimited" resources (in comparison to resources in
academia) give us the chance to study human dynamics in unprecedentedscale and detail.

All of these are interesting but these kinds of work are not very relevant to Indonesia. Although the Internet in Indonesia is growing, the scale of the usage – in terms of business or social – won't be even near the usage in the US anytime soon.

However, I think there is an area in particular in which similar basic ideas can be applied in Indonesia: the microfinance industry.

I know next to nothing about microfinance, but here is what I think. To my understanding, microfinance is about figuring out ways how to do business with people who are traditionally unbankable. They are usually poor people in rural area. They are untouched by traditional
finance system because it is too hard to assess their credit worthiness or it's simply too risky.

One way to overcome the problem is to deal them collectively instead of individually. The idea is to utilize some group mechanisms to minimize the risk: group members would make sure everyone to repay the loan and hence guarantee continued access to lenders.

We can approach the problem as an interdisciplinary mechanism design problem: social scientists and social psychologists could study the relevant properties of group dynamics in (rural) Indonesia, then, together with economists, design how incentives could be structured
in a particular setting.

The project, I think, is intellectually interesting and would be easy to gain support since everyone cares about the poor in Indonesia.

Is this possible?

How valuable are social networks?

An interesting article in the Economist on the Facebook phenomenon. It mainly discussed from the business perspective. But it also has an interesting side-question worth elaborating: what are the returns on social networks? Forget the what or how much for a while, are the returns increasing, decreasing or constant?

From one perspective, investment in social networks seem to have increasing returns. Think about your friends as possible sources of information (on job, prospective boy/girlfriend, where to buy new car, new technology or other cool stuffs). Or sources of 'ideas' (how to solve the Hamiltonian homework, who to make fun in the column in the campus billboard). Then the benefit of having ten friends is more than twice of having five.

If this is the case, then companies or any other organizations that base their activities on social networks will have an ever-increasing values if their customers' networks are expanding. Think about cellphone companies. It worth having a cellphone if I have a certain number of people in my networks (the one I will be very likely to call). That's why we see a lot of promotion package like member-get-member, family plan, group package, etc.

The article also wrote the implications for social network websites like Facebook, Friendster, Flickr and so on. But here's the catch, as mentioned in the article:

But unlike other networks, social networks lose value once they go beyond a certain size. “The value of a social network is defined not only by who's on it, but by who's excluded,” says Paul Saffo, a Silicon Valley forecaster. Despite their name, therefore, they do not benefit from the network effect. Already, social networks such as “aSmallWorld”, an exclusive site for the rich and famous, are proliferating. Such networks recognise that people want to hobnob with a chosen few, not to be spammed by random friend-requests.

So which one is it; do social networks have increasing or decreasing returns? To be honest, I don't know the answer. As usual, when you can't give a firm answer, in the conclusion you'd say "this should lead to further studies."

Nevertheless, an old paper by sociologist Mark Granovetter provides a valuable direction. We need to distinguish between strong ties and weak ties. The paper explained the power of weak or impersonal ties -- in which an individual friend may become a hub to other people outside of our network.

So, the optimal strategy may not be investing in as many friends, but in a limited number of friends, who individually have other friends in their own networks.

Oh My God, Social Capital Exists!

Last week before lecture, I had lunch with Aco at our own Faculty of Economics refectory at Depok campus. As years gone by, only few familiar faces I know at otherwise very crowded lunchtime in that place. One of them is my good friend Topik. He is the waiter, well, not really a waiter, but the man who gives us here luxury to have our ordered (cheap) student's meal delivered to our table. Eight years ago he was with the ice tea outlet, but now with less frequent traffic of chicken noodle delivery.

I told him that I did not feel like having chicken noodle at that time, and asked what is the best food in the refectory. Aco might think that I was crazy asking such stupid question on the quality of competitor's product, but Taufiq gave me his suggestion anyway . Mutton tongseng (ask google, if you don't know this), he said. I trusted him and we both had that meal. It was good.

On our way to the class rooms, Aco, himself the great skeptic of social capital, said that this should be blogged in the cafe. The title: "Oh my God, social capital exists!". It means if you invest in social capital (or trust), by befriended with Topik, it will help you to get the information, make the right decision, and raise your utility (good tongseng)

I think AP, the fan of Robert Putnam, would love to say to Aco, "I told you so"

Putnam confirmed

In "Making Democracy Works" (1994), Robert Putnam shows how civic community matters in governance and democracy. He made Northern vs. Southern Italy has his case. Then, in "Bowling Alone" (2001) he wrote that civic participation has been declining in the U.S. TV and radio were to blame for that.

Scholars have been disagreeing over his work. I will leave the disagreement for another discussion. One interesting question to ask would be "how true is the claim that TV and radio contributed to declining civic participation?"

An interesting paper by Ben Olken tried to answer that using survey data from more than 600 villages in Centarl and East Java. The methodology is very interesting. He looked at the number of TV channels can be reveived in each village. Based on Putnam's work, he hypothesized that the more channels can be received, the lower the level of civic participation. Since Putnam also argued that level of civic participation correlate with governance, more channels should also negatively correlated with quality of governance.

But a simple linear regression suffers from reverse causality and omitted variable bias. There may be other factors correlated with channels reception and participation as well as governance. To deal with this problem, Olken exploited the exogenous factor that affects channel reception: geography of each village. Villages surrounded or near the mountain will receive less channels (perhaps only TVRI and RCTI). So he uses the information on several determinants of channel reception in each village (geography, topography, relative position from nearest transmitter etc.) as the instrument.

The IV regression results were fascinating. Number of channels is negatively correlated with participation in social groups (community meeting, gotong-royong, arisan or religious groups), trust (other measure of social capital), and "missing expenditure" (as proxy for corruption and governance).

So, Putnam's theory is confirmed then?

Methodology | Social capital

Is Social Capital Really Capital?

The demanding Manager asked me to serve this drink in the cafe. She doesn't like the idea of moonlighting --including, even, serving my own drink at home. So here it is (cross-posted at here, with minor modification)

This is, of course, a fiction, in response to previous fellow host's posting:

Once upon a time an economist had been confused. He found two countries, Banana Republic and Togog Republic, have similar resources, endowment, size, economic structure, political system, etc --in short, they're almost identical, like twin. Yet he also learned that Togog Rep. grew so well, Banana didn't.

Having frustated to find the secret of Togog Rep., he went to entertain himself playing bowling. His bowling mate is an anthropologist who incidentally was reading Bourdieau (1986) for his ethnography work on the Mighty Maridjan case in Mt. Merapi Central Java.

The economist, while waiting his turn, read that book and encountered the term social capital. A light-bulb flashed in his head. He said to himself: "Voila, this is the answer. Togog Rep. had higher social capital".

He started writing, and to make it catchy and relevant to his readers --they don't have Maridjan's fortuneteller game-- he put a title with something related to bowling. It turns out everyone seems love the idea.

Except this crazy guy from Salemba, I, who ask how to have reliable social capital measurement, and more importantly, whether this social capital is similar to old definition of capital, that is, subject to diminishing return, reproduce-able (through investment), and has various rates of return (and what determine this return).

Social capital

Does internet connect or separate people?

This is a spin-off from my earlier posting on the Police's "Message in the Bottle." Actually, I wanted to comment on Roby's comment. But since this may be a different subject, I guess it's worth being posted as a new entry.

Roby argued that internet (blog, friendster etc.) might connect people. But at the same time it could also create alienation. This reminds me of a similar but different discussion on whether internet makes people from different groups (professions, political ideology, hometown etc.), or even segregate them more?

In the social capital discussion, Robert Putnam raised the concept of 'bonding' and 'bridging' social capital. Another thing he rasied in "Bowling Alone" (2001) was the declining trend in the of civic and community engagement in the U.S., partly because of TV. But other people challenged his argument by pointing that people may still engage in civic activties by other means. Town meeting, rally, petition may still exists but people now can do it through online petition, email communcation, blogging etc. So internet can be a source for 'bridging' social capital.

But internet can also be a source for 'bonding' social capital that segregate different groups of people. This paper shows how it can happen in science. Suppose A and B is are economists, but live in two geographically separate places. A has two colleagues, C and D, who are non-economists but live in the same area with A. Consider the world when communication was still difficult. A will interact more with C and D, which imply the possibility of a cross-disciplinary collaboration.

But because of the revolution in communication technology, A can now easily interact with his or her fellow economist, B. So economists will be more likely to talk only with economist, reducing the possibility of cross-disciplinary interactions. In the authors' language, internet will "Balkanize science."

Well, we could still argue otherwise. Because of communcation, economists who tend to group together can have more access to their non-economists colleagues. At the end, the conclusion can happen in both ways.

Social network