From the Manager

Hi,

Sorry, I'm late. We're gonna be playing 1) Anatomy of a Murder (Duke Ellington), 2) Birdland (Weather Report), 3) Birdland (Quincy Jones interpretation). I hear you singin' already...

Managerial Stuff

The Cepu dispute: a game theoretical perspective

I admit that I did not follow the Pertamina-ExxonMobile dispute over the Cepu block from the very beginning. I also admit that I don't have the perfect information about this controversy. Therefore I won't try to comment on detail about this, nor will I make a judgment on who should be the operator.

I just want to comment on one thing: will 'nationalism' (or similar arguments like 'beware of foreign intervention) make good basis for judgement? For some people, the answer is yes. And I respect that. But would that mean that the people of Banyuurip-Jambaran and Bojonegoro, who prefer ExxonMobile over Pertamina, less nationalistic than they are in the parliament building, or anyone claming to the 'people'?

Talking about nationalism, Kurtubi argued that whoever the operator is, the central government will always have 85% production share, and local government 1.5%.

So if nationalism would not make a good argument, what will? I don't know, frankly. But let me summarize the situation, but please let me know if I'm wrong. We know that oil exploration is a very risky business, and requires a significant amount of investment. And when one started the exploration, it takes some time before your investment start to make return. That's why if you are an oil explorer, you would want a guarantee that you can operate it for a certain period.

The key to the controversy is ExxonMobile wants to extend the exploration contract to another 30 years, from its initial expiration year 2010, after they found that the site have much more potentials. Pertamina argued that the contract can not be extended, and the operation should be transferred to Pertamina when the contract expired.

This can be illustrated by a simple game theory model. From ExxonMobile's perspective, you would 'produce' if you are guaranteed up to period n. If there is no guarantee, or the guarantee is less than n period (in this case beyond 2010), then the Subgame Perfect Nash Equilibrium would be 'not produce' at any period. Means the site would be idle from now until 2010. Even if Pertamina enters the production in 2010, there would be a few years to set up before production starts to be realized. If that's the case, there would be an oil production idle for about a decade. And we are an oil net importer already by now!

Again, I don't really know much about this issue. There is a broader dimension if this controversy, such as the legal aspect. Was Exxon's acquisition of Humpuss legal? And so on. [By the way, was Pertamina not really interested in Blok Cepu before ExxonMobile acquired in from Humpuss, then found out that the site was very prospective?]

What I know is, from the perspective of 'national interests' (whatever that means), clearly no one benefits from the prolonging uncertainty.

Game theory

Protection: A Tale of Three Countries

Imagine three countries: Wonderland, Dixieland, and Boogieland. Dixieland has lots of cheap labor who can produce hundreds of broomsticks everyday. They export them to Wonderland. As time goes by, Wonderland's people start to make their own broomstick, in addition to their famous cheese. Alas, the people there don't accept as low wage as Dixie people do. So, Wonderland's broomsticks end up more expensive than Dixieland's. What about Boogieland? Boogie people don't make broomsticks. While they do have cheap labour, they lack the raw materials for broomstick -- they're happy producing toothpicks.

What would economics suggest? Yes, Wonderland should not produce broomstick and stay with cheesecake factories. Let Dixieland make all the broomsticks. Of course Boogieland should stay with toothpick industry. Then all three should gain from trading one another. They all gain. But who is the biggest gainer? No doubt, it's the consumers. Is it not fair to the producers? Only to producers who never consume anything (Can you think of somebody like that? Ask any producer who happens to shop in a supermarket, does he like his apple cheaper or expensive).

Enter politics. The Wonderland Association of Broomstick Producers (W-ABP) lobby their government to impose an import duty on Dixieland's broomsticks. "This is the only way to save us, Mr. Minister. Otherwise we'd all go bangkrupt. How can we pay our employees? For the love of God, impose a duty". Their demand is granted by the Department of Protection. As a result, Dixie broomsticks become more expensive in Wonderland's market. Now the consumers (incl. broomstick factory employees) have to pay higher price for the benefit of local broomstick factory owners.

Across the ocean, the Dixieland's D-ABP's Chairman is outraged. "This is insane. We can produce broomstick more efficiently than them. We're actually supplying their people with inexpensive broomsticks! We even come with better quality! But because of that we're punished?". The Dixieland broomstick makers decide to go to their own Minister of Protection. Without further ado, they are granted their own form of protection. It's an export subsidy. They're happy, as if they don't know that their government finances the subsidy using their (the people's) own money, and consumers' money. Both Dixieland's producers and consumers don't realize that they are paying for the protection, with bigger share from the latter. All consumers pay for the protections.

Again, time goes by. Two years later, both Wonderland and Dixieland forget already that there has been an import duty on Dixie's broomsticks that enter Wonderland. All they know is the current price is higher than it used to be.

But Dixieland's broomstick makers "adjust faster". In order to "steal" more of Wonderland's broomstick market, they decide to set the profit margin there to ... zero. Of course, to ensure profit overall, they maintain a positive margin back home.* They make huge profit. They attract many foreign investors, including the now-called Broomstick Worldwide Inc. Soon, all the shares in Dixieland broomstick industries are owned by multinationals.

Now it's the time again for W-ABP to visit the Department of Protection. "Mr. Minister, this isn't pretty. Those Dixie people are stealing our market. They set their price lower here than there at their home. You should do something, for the good of the country". Mr. Protect grants them another sweet candy: import quota. (No one tells him that "dumping" is actually a ... charity **). Now, only 50 Dixie broomsticks a year are allowed to enter Wonderland. Dixie's D-ABP has a big headache. As for Broomstick Worlwide Inc it's a heart attack. Finally they should decide to make their broomstick somewhere. "It should be at least as 'efficient' as here," says the BW Inc's CEO Bill Bads. That means, "Find a place where we can pay labor as low as here. No, lower". And they fly to Boogieland. Broomstick industry in Dixieland is pronounced dead.

It's no surprise at all, Boogieland people are happy. Now they can score a punch on Dixieland's face. Ugh, why is that? Well, rumor has it, Boogieland's market has been flooded by cheap garment from ... Dixieland. Darn it, it turns out Dixieland also produces garment, contrary to what I told you above! No wonder it loses the broomstick! ***

End of the story? Not quite so... You can expect the protection pendulum to swing again. And it'll keep swingin'... Someday, Boogieland's broomstick association representatives will visit Ind..., oops, I mean Boogieland's Department of Protection. And you will tell yourself, "This looks familiar. Where did I read it?"


*) In economics we call this practice "price discrimination". In politics, people call it "dumping" -- even though we reserve the latter word for a situation where the price is lower than the marginal cost in one market and compensated in the other; alas this too has its political name: "predatory price".
**) Is it not? Look, somebody produces identical toys. He sells it to his friends at $2 and to you at $1. Don't you like it?
***) This is the infamous principle of "comparative advantage", after David Ricardo.

p/s. Sorry for no links -- It's imaginary world! But hey, this partly looks like a real word representation in a way...

Economic Philosophy

From the Manager

Hi,

Rizal sounds blue. So why not playing his request. It's Bill Evans' In a Sentimental Mood. And we can add two more: Duke Ellington's Mood Indigo and Dexter Gordon's Three O'Clock in the Morning.

By the way, Java Jazz ain't cool.

Managerial Stuff

Let the Bads be there

So the Undercover Economist's family moves to Hackney, London --of all places. From there he discussed the problem of externality --a cost or a benefit that affects bystanders, he said-- in Financial Times (link might be non-permanent), or in his own website under the title Friend Chicken versus Fresh Air.

He went to say that negative externalities of living in a London neighbourhood, such as Hackney, are coming from stuffs like "..pub with late licences; takeaway food; garages; tyre shops; massage parlours; and betting shops..." --man, except those last two, for me, they're positive!--

But, unlike what the standard textbook suggests to overcome this problem --you know, taxation or bargaining--; he argues that "..Taxation is too clumsy, especially when wielded by unresponsive local governments. Bargaining is fine in the textbooks but unappealing in reality..."

Bad news? No. Let the bads be there since the positive externalities of living in London, and in any other big city, would outdo them. And "...it turns out that people flock to London not to seek their fortune but to enjoy the things that money cannot buy..."

The things that money cannot buy: plays, museums, bloomsbury, park, culture (incl. snobbishness) and etc, etc, etc....well, right!

p/s: By the way, manager, can I request the standard "In a sentimental mood", this time by Bill Evans?

Everyday Choices

The tragedy of moral policing

Read a news about a funny but sad story in Tangerang, Banten. Once again, this just shows what's going to happen when you give the state too many power over morality.

Can't help to agree with the chair of the National Committee against Women Violence, "when the state wants to become the moral police over its citizens, who will be the first victims? Women and poor people!" And this is also why among the biggest rejection to the proposed legislation about pornograpgy comes from various women groups.

Finally... a good article on neoliberalism

Finally... a good op-ed piece about neoliberalism. Not the usual ones full of jargons and finger pointings. I am glad that the author, who as a philosophy professor has the academic authority to say so, points out that the so-called neoliberalism is at best a (false) theoriticization. I think what he means is the concept of neoliberalism that is often heard and raised nowadays.

He uses the word 'ghost.' I agree. Neoliberalism is merely a ghost, because everyones talk about it and see it as something scary, but the true existence is not clear. Many people of course defines neoliberalism as X, Y or Z. But for me, that was like what MUI did a few months ago on pluralism, liberalism and secularism. You assign your own definition on the concept, and you attack that very definition by yourself. Or, if I may be more cynical, is what the New Order did to communism and socialism. You just label anything bad with those terms.

Another points the author raised was about the Washington Consensus. This was also a historical accident. John Williamson, the one that first came up with the term, had never thought that this term will become very popular, in a bad way, and in a different way than its original meaning. Originally, Wash Cons was just a term to illustrate the lowest common denominators among Washington-based policymakers, international organization and academics about what should the U.S. policy towards Latin America in the '80s be. That was all. It was not a document or agenda of a global economc imperialism, as many people tend to view it now. Even that was not really a consensus. The degree of disagreement among the related person was, and is, very large.

The author, however, still agreed that there is such thing as 'market fundamentalism,' which is "nested in the heart of neoliberalism's philosophical theory." I don't disagree with that. But I also agree with him that the rest are just fallacies. It is a fallacy to claim that 'market fundamentalism' is everything in economic theory. It is a fallacy to think that 'market fundamentalism' is the only thing why most economists believe in, and call for, market-oriented solutions.

It is a fallacy to view that 'market fundamentalism' is everything manifested in the current domestic and global economic policies (how can you argue that protection or banning rice import is what the market fundamentalists call for?). Moreover, the biggest fallacy is to draw a causality between neoliberalism and poverty, inequality, marginalization, and so on.

Economic philosophy Neoliberalism

The rise of philanthrocapitalism

I don't think the Economist editors are regular visitors of this cafe. But following Aco's posting several weeks ago, the Economist's just wrote a special report on philanthrophy. Not that philanthrophy business is a new thing, but it has been flourishing during the last few years.

The report shows that philanthropic tradition is stronger in the U.S. than in any other rich countries. The philanthriophic giving in the U.S. in 1995-2002 amounts for almost 2% of the GDP. This is far more than Canada and all welfare-state type Western European countries. Of course we can see this as a substitute between state and private efforts. Because of the welfare state tradition in Europe, the government has been leading the philanthropy-like activities and redistribution efforts.

While during the past few years there has been rising criticisms against capitalism (neoliberalism) and growing concerns about widening inequality, the rise of philanthropism may be an anomaly to the current trend. This may be lead to various interpretation. One can argue that this only shows that men are not necesarrily homo economicus, as assumed by the liberal economists. On the other hand, there will always be debates on what motivates the philanthrophists. If we don't like the term pure altruism, we can see it as a social investment, or just expecting a positive utility by helping people. On a more cynical view, people may see philanthrophy as ways of escaping tax (that is, a way of getting richer), or even putting a Dr. Jekyll's mask in the face of Mr. Hyde dirty, illegal business.

Whatever the true motives are, philanthropism is an inherent aspect, an underrated one, of the development of capitalism. As the report quoted Uday Khemka, and Indian philanthropist, "Philanthrophy will increasingly come to resemle the capitalist economy." Claire Gaudiani
even further argued that philanthrophy can (will) save capitalism.

But as this 'business' is growing, doing it also requires the logic of capitalism: the right incentives and competition. It needs the right incentives, both for the giver - the rich who wants to donate their wealth, as well as for the taker - how to avoid the money create distortion to the behavior.

And, contrary to the old saying "don't let your left hand knows what the right hand gives," the report argues that you need to show other people what you do. This will create competition among philanthropists. With competition, no one will be too powerful due to their money. Also, when an effort is made public, people would know what efforts work and what did not.

Rationality | Philanthropism | Capitalism

Help, we don't want good, cheap stuff!

I've been restraining from posting. So that I can comment on silly, selfish, xenophobic complaints like this, this, this, or this without being too rude. (Ugh I guess I just failed?)

If you're busy (or you don't speak Bahasa Indonesia), don't bother clicking the links. I'll tell you what they're about: protection begging, as usual. Even a nine-year old would have asked: why do we not want good, cheaper stuff, if somebody actually offers it?

Alright, if you insist, here's what really bothers me. They say, "Chinese products are way cheaper than ours", and "they even come in better quality" (hey, isn't it too obvious already, what should we decide?). Then, "This ain't good for local industry", and you get it right, "The government should impose more duties". And the song continues...

I wonder if anybody go ask one of those businessman. Does he really love expensive T-shirt, with a quality he can actually buy at a lower price? If he says yes, then I rest my case. But who thinks he would?

It is striking that many people (including the media) think that production is an end. While it is not. People produce to ... consume!

Everyday Choices

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