How to win an election with less money, or how to have efficient money politics

Welcome to the country where (vulgar) money politics is a common norm. Can you win a (local) election without money to buy votes? Very unlikely.

So money matters, but can you win the game if you have less money than your opponent? You might think it can't be. Money speaks and more money speaks louder.

But perhaps you can still make it.

Suppose your opponent has paid IDR 50,000 for each possible voters, and with the money you have, you can only pay IDR 10,000. My strategy would be to declare that I will give that IDR 10,000 to the voters, not now, but only after I win the election.

The rational voters will take IDR 50,000 from my rival, but vote for me. Why? Because it increases their probability to get additional IDR 10,000 from me --the amount that I will disburse only when I get elected.

But maybe things won't be that easy, my opponent might know my trick. If so, he/she will think that IDR 50,000 is too high and go for, say, IDR 15,000 --he/she is still richer than me, remember?

Let the game repeats. At the end of the day, we have the most efficient money bribe rate, do we?

Harry Potter and the Game Theory

Warning: possible spoiler

Call it what you want, but yes, I am a Harry Potter reader. I am now reading the seventh book (which I got it exactly on July 21st). I have halfway through so I can't tell whether Harry's going to die or, is he marrying Ginny, or else. But there are some passages from the book that, I think, make good examples of game theoretical concepts and situation.

So the Order plans to move Harry from the Dursleys' to the Wesleys'. But with Death Eaters patrolling, ready to intercept, they need to set a plan. The success would depend on what the Death Eaters' move when they choose one strategy. Similarly, the Death Eaters' strategy would depend on the Order's strategy. And so forth.

By the way, the initial strategy was to duplicate Harry into seven. This way, they hoped to split the Death Eaters' attention and efforts. Well, to make the story short, here are some quotes:

'We think the Death Eaters will expect you to be on a broom,' said Moody, who seemed to guess how Harry was feeling. 'Snape's had plenty of time to tell them everything about you h's never mentioned before, so if we do run into any Death Eaters, we're betting they'll choose one of the Potters who look at home on a broomstick..."

This was before they separated. So Moody was doing forward induction analysis.

Then, after they -- well, not all of them -- reached the Wesleys':

'You-Know-Who acted exactly as Mad-Eye expected him to,' sniffed Tonk.s 'Mad-Eye said he'd expect the real Harry to be with the toughest, most skilled Aurors. He chased Mad-Eye first, and when Mundungus gave them away he switched to Kingsley...'

Here we can see two things. Moody's another forward induction before they went, and a backward induction analysis on You-Know-Who's move.

Somehow, Voldemort and the Death Eaters were finally able to identify the real Harry. How?

'...Expelliarmus is a useful spell, Harry, but the Death Eaters seem to think it is your signature move, and I urge you not to let it become so.' [said Lupin].

This is an example of a strictly dominated strategy.

where the hell is NIKE PR?

Nike came into focus in Indonesia because it stopped ordering shoes from 2 firms (owned by a lady) that employs 14,000 people because Nike thinks that those firms have been continuously underperforming and would like to shift order to other firms (possibly within Indonesia or to other countries).

Nike is obviously just a buyer. Those firms, owned by the same lady, are the employer of 14,000 people, thus they are the ones who should be responsible for recruiting, paying, training, and managing production. On the contrary, from a business contract point of view, Nike has no slightest obligation to navigate the fate of those workers.

So far public opinion is split between those who understood that this is a an employment contract issue between two firms and their employee, versus those who think Nike is the actual employer.

Luckily many good op-eds have come forward to say that the owner of those firm is manipulating her turf card, 14,000 workers, to get the best out of this chaos.

But where is NIKE PR? How come I have not seen a sober and rational explanation behind what is going on? Is it really the case that shoes produced by those firms are lemons? Or is it Nike who is looking ways to shift to suppliers in other countries?

Whichever the reason is.. Where the hell is Nike PR effort??

Asmuniconomics

After abstaining for 6 months from the Cafe, I'm moved to say farewell to Asmuni, a veteran Indonesian comedian who passed away last Friday. Because this is too local for international audience, I'll write my obituary in Bahasa.

Innalillahi Wa Inna lillahi Raj'un.

Asmuni itu kenangan dari hiburan rakyat, jaman kita puas dihibur oleh Presiden yang sama sejak G-30S, oleh pertumbuhan ekonomi > 6%, oleh program KB nasional, oleh 1 siaran TVRI, oleh Aneka-Ria Safari, oleh liputan hari ABRI, dan oleh program swasembada beras.

Asmuni itu lambang perjuangan nasional para batur/pembantu yang ingin maju tetapi tetap kampungan. Asmuni lambang orang kaya desa, bangga dengan blangkon, cincin akik, dan sekuter. Asmuni juga representasi kebanyakan pejabat PemDa, camat, lurah, RT-RW, berusaha wibawa tetapi tetap tolol dalam tindakan.

Tetapi Asmuni melawan. Asmuni melawan keterbelakangan yang seolah menjadi nasib masyarakat kelas bawah. Asmuni melawan kemapanan. Asmuni melawan mitos penguasa adalah orang bijak. Asmuni mentertawakan Jawanisasi bawah sadar era Suharto.

Asmuni itu vintage. Besar di era Orde Lama, Asmuni termasuk artis 3 jaman.

Apakah Asmuni seorang ekonom? Bisa jadi.
Well.. it might be a long shot. Tapi ini beberapa quote yang saya ingat:

1. On German efficiency "saya sudah konsultasi penyakit dengan dokter dari Jerman, namanya dokter Bode"
dr Bode itu figur virtual di iklan obat Bodrexin

2. On factor specialization "kamu sana belio rokok di Madiun"
konteksnya majikan ingin bermesraan, pembantu tetap harus kerja

3. On social issue "Lho.. orang kaya kok salah..!?? hahaha"
orang kaya sombong

4. On moral hazard "kamu tungguo di sini, saya ta' nunggu di Jombang"
konteksnya Timbul/pelayan disuruh menunggu datangnya Drakula sementara pejabat desa ngacir

5. On exchange economy "awas.. Keris ini asalnya dari ular.., ularnya saya jual terus dibeliken Keris"

6. On poverty ".. saya in cuma bisa makan CAP JAE.."
Chinese food adalah konsumsi elite era Ordelama. Konsusmi rakyat biasa nasi jagung.

7. On permutation ".. itu adalah hil yang mustahal .."

Selamat jalan Asmuni. Indonesia kehilangan salah satu seniman besarnya.

What CSR?

Here is from The Jakarta Post daily, 21 July, 2007.

The House of Representatives finally passed the controversial corporations' bill into law at a plenary meeting here Friday making Corporate Social Responsibility (CSR) mandatory for almost all companies outside the financial sector.

Article 74 of the law provides that a company that operates in any business field related to natural resources is required to institute social and environmental responsibility programs, and that sanctions will be imposed on non-compliant firms

What are CSR(s)? My take:
1. Making profit
2. Pay taxes to the government, and/or abide by the government regulation

Then you, our valuable cafe visitor, may ask:
1. Who will take care of social and environmental damage (read: negative externalities)? The government.
3. How? By imposing the right tax and regulation to minimize negative externalities.
4. Is there anything 'social' in making profit? Yes, you can make profit if you are competitive and efficient. And both lead to greater social welfare.

On Psycho-economics

Tirta, a psychologist-in-training who knows a little quite a bit about economics thinks psycho-economics still have a long way to go before we can use it to dismiss conventional economics. He's in fact worried that psycho-economics is fast becoming an empty fad. - Manager

On Psycho-economics
by Tirta

Here's a provocative comment from Terry Burnham (which was emailed to me by our sociologist friend a while ago):

"At one level, the logic of economics is so rigorous, but it is built on a foundation of folk psychology that we would mock in other fields..."

To put things in context, the comment was made in response to a 2002 study by Andrew Lo and Dmitry Repin, the former finance professor, the latter neuroscientist. The two guys jointly discovered that heart beat, blood pressure, and skin sweat were crucial in predicting the behavior of stock traders. They went on to claim that there's a lot of irrationality and emotion going on in Wall Street and places alike, which were once thought by many economists to be full of heartless people.

Incidentally, it turns out that Burnham was the guy who did the recent testosterone study, which found that the more you have the masculine hormone, the more you will reject unfair offers in standard ultimatum games. Alpha males, in other words, are psychologically fond of equality and distributive justice (not necessarily through philosophical reflections though, as I've alluded here).

Guys like Burnham are commonplace today. These are people who apparently are not satisfied with standard economics models of rational agents. They resort to psychological constructs and colorful brain pictures for insights on how to explain some economic behaviors. They like discussions containing words like 'intuition' and 'emotion' more than those sticking with 'rational', and seem to think that these psycho-economics explanations are one step ahead closer to the truth of why we behave the way we do.

Well I'm a psychologist-in-training who happen to know a tiny bit about economics (at least this Cafe's version of it), and I don't think so. Here’s why.

Psychologists have only began to explore the workings of intuition and emotion in the 1990s. In the 1920, we were obsessed with the relationship between stimulus and response, which at best gave birth to learning and conditioning theories applicable mostly to rats. In the 1950s, we finally saw the light, and dared to open the black box -- namely, the mind -- and started to converse in terms of memory, thought, personality, attitude, and the likes.

But we didn't talk about emotion or intuition until only recently. Of all topics in psychology, emotion and intuition are among the most alien and under-researched.

Current psycho-economics explanations are mostly tautologies, because the mechanisms of the mental properties they are referring to are themselves subject to active investigation. Yes, emotions do influence traders and ultimatum game players, so they are not as rational as they were thought to be. But the questions shouldn’t stop there: How exactly do emotions exert their influence? Which emotions? Under what circumstances? How do they interact with cognitive-based judgements and decisions? And the list easily goes on.

Psychology still doesn’t have a sound theoretical basis as to how emotion and intuition work, and more importantly, how they both relate to cognition at large. As interesting as those colorful brain images (usually coupled with paragraphs consisting of those weird latin words familiar mostly to medical doctors) can be, we still have no idea on how to tie them all together to explain why we do what we do – and why we think what we think.

So it's ironic when some economists think that they are significantly advancing the field by referring to psychological concepts like 'emotion' and 'intuition', which have only been around in the psychology literature for a decade or so, and of which our understanding is clearly minimal.

I think psycho-economics are becoming more and more like an empty fad. Some scientists got a little bit too excited and make too much out of it. As do the journals, newspapers, and blogs.

Here's another example, which actually got this post started in the first place.

A few weeks ago, I sent this op-ed to some of the cafe's managers. Roland Fryer, a Harvard economist, recently suggested that rewarding money would make bad NYC students more diligent and studious. Barry Schwartz, a Swarthmore psychologist who wrote the op-ed, disagreed. He pointed out that this simple reward scheme would distort the many other motives that are inherent to learning.

Responding to Barry's piece, here is an economist friend of the Cafe:

"Probably due to my own bias, but I tend to side with the psychologist on this. I have seen a similar phenomenon at [my place of work] where people who focus on the financial incentives do not produce quality work relative to those who are interested in the work per se. I think multiple objectives do compete (which is why economists don't believe in corporate social responsibility), and this incentive will skew the objective of going to school."

It's true that humans have competing motives all the time, and yes, money is one of them. And going to school, surely, should be based on the noble motive of learning-for-the-sake-of-learning.

But I'm not sure if I totally agree.

One may criticize economics, as I automatically did when I read the op-ed initially, for freakonomically assuming that everything -- learning and school included -- is about the right type and amount of incentive. Yet psychology, so far as it recognizes the many different faces of motives, intuition, and emotion, has no idea as to how these mental attributes really interact. We know that it’s not just about money. The problem is, we don’t really know what the rests are.

So here’s my question. When these bad students are already devoid of the intrinsic motives of learning, which I presume was what Fryer had in mind, which would you pick: play carrot-and-stick to at least feed their mind with something that is potentially useful, or leave them as they are on the street with no better mental arsenals to face the future?

I personally would opt to be pragmatic, simplify matters appropriately, and thus side with the conventional economist. At least for the time being.

The President Needs to Update His Reading Materials

SBY's jumbled speech against "communism", "capitalism", and "neoliberalism" on the 60th National Cooperative Day in Nusa Dua, Bali, has not gone entirely unnoticed. Ape said it's a pointless speech. In his fourth dispatch for us, MT writes that SBY has grown to be an ineffective president, and his incoherent speech merely reflects the administration's incoherent policies. - Manager

The President Needs to Update His Reading Materials
by MT

Whenever leaders fail they resort to either fascism or populism. More than two years after he was directly elected president, with an unprecedented level of popularity, President Susilo Bambang Yudhoyono finally registered the worst in his job approval rate. He also has grown to become ineffective President, with all his directives getting lost in the redundant bureaucracy. Case in point, his handling of Lapindo mudflow (also more than two years after the infrastructure summit, investors are running away from numerous toll roads project).

Last year, I went with him in a visit to Singapore and Malaysia during which he met with prominent business circle and offered scores of projects, but to this day I never heard them expressed interests. The palace asked me to join the President for a trip to South Korea next week, but I am taking a leave already). It is therefore predictable, that his administration resorted to jingoistic terms when dealing with calls for separatism.

In only less than a month, Yudhoyono administration had to deal with what could be considered as efforts on seccesionism; the South Maluku Republic (RMS) flag-waving incident in Ambon, the display of Morning Star flag during a dance performance at the Papuan Tribal Council Congress and the decision by former Free Aceh Movement big wigs to use the symbol of the former rebel group as logo for a new local party. Senior ministers in his cabinet said something about refusing to tolerate separatism and will resort to severe measures to crush it. The separatism issue, however, is a hard sell. Beyond sporadic protests from Muslim student-based organization, we saw no serious and organized responds for the so-termed separatism campaign.

But the most glaring example of Yudhoyono’s incompetence is his ill-advised decision to resort to populism. It is difficult to believe that in the early 21st century, a country leader made a head-scratching call for a rollback to bygone ideals.

The first was his decision with a smack of populism was to disband the Consultative Group on Indonesia (CGI) earlier this year. And last week we learned that the government decided to hike the foreign debt.

Last week, he said something about taking a middle ground between communism and market-based capitalism. Market-based economy, he said, has proved incapable of bringing social justice and equality to the people, and instead fosters greater disparity between rich and poor."Meanwhile, communism, in which the government fully controls the economy, has failed to reach the goal it believes it can achieve," he said. And to ensure equal distribution of wealth, Yudhoyono pledged to boost the roles of the government! But was it not the reason why this country has problems eradicating corruption? The rhetoric, however, was less an indication of his believe to olden days ideals than the incoherence of his government policies. And if his series of stately speech was of any indication, it is obvious that he had problems looking at problems and how to devise policies to address them.

Earlier last week, when he opened the exhibition of tourism-related products, he said the need for Indonesia to jump from capital-intensive economy to creative industry-based one. (I thought we needed first to make a leap from land-based economy to technology-intensive first). In the speech, he also makes a reference to futurist Alvin Toffler (again this is early 21st century and yet he quotes a book conceived like twenty years ago).

But it also dawn in my mind that aside from his haphazard efforts to remain relevant but choosing big, empty slogans, it seems that he needs to read his reading materials.

Does Giffen behavior exist in reality?

Update: somehow I forgot that the Giffen thing has been discussed by Aco, more than a year ago. It was in September 2006, just when I arrived back in Jakarta. Maybe that's why I forgot to refer to it.

In every college-level microeconomics textbook, there is always a discussion on a special circumstance when the demand curve is upward-sloping: the Giffen good. Theoretically, the situation arises when the income effect outweighs the substitution effect under a price change.

A good can be a Giffen one if it is a basic commodity that makes up a large portion of a poor's income. The term was named after Sir Robert Giffen, a Victorian-era British economist, who argued that potatoes during the Irish potato famine fit this bill for the starving Irish:

Since potatoes already made up the bulk of their diet and consumed most of their income, as prices rose due to the potato shortages, what little discretionary money they had for meat and other food disappeared. No longer left with enough for even morsels of meat, the peasants desperately threw their remaining pennies back at the potato vendors for a few more spuds, thus driving prices of the scarce commodity up still further (a summary from The Nation).

If it's still hard for you to imagine the situation, consider Dani Rodrik's opposite illustration when the price declines instead of increases:

Imagine a very poor household who spend a very large part of its income on some subsistence commodity such as rice. Now suppose that the price of rice goes down for some reason. How does the household alter its pattern of consumption? One response is to increase consumption of rice at the expense of other things because rice is now cheaper. This is the standard substitution effect that ensures demand curves are downward sloping. But another is that the household's overall purchasing power--its real income--has increased and therefore the family may choose to consume things, such as meat, that richer families tend to consume. If this decrease in demand for rice outweighs the substitution effect, we have a Giffen good. Put differently, the lower price of rice allows the family to satisfy its nutritional needs by a tastier combination of products, one that relies less on rice and more on meat.

The question is, does a Giffen good exist in reality? No one is quite sure. Even Sir Giffen's argument was based on speculation instead of empirical evidence.

A recent paper by Harvard's Nolan Miller and Robert Jensen (was at Harvard, now at Brown; I happened to took their classes) claimed to be the 'first, rigorous empirical evidence of the existence of Giffen behavior. ' (Note: The authors preferred to use the term 'Giffen behavior' instead of 'Giffen good' since, as they wrote, "it is not the good that is Giffen, but the consumers’ behavior").

They ran a field experiment in the Hunan and Gansu provinces of China, in which they randomly subsidized households’ primary dietary staple (rice in Hunan and wheat flour in Gansu). As the prices of staples are cheaper, they observed a strong evidence of Giffen behavior with respect to rice in the Hunan province. They also found a less clear evidence of Giffen behavior in Gansu with respect to wheat.

They have an interesting way to begin the conclusion section in the paper:

It is ironic that despite a long search, in sometimes unusual settings, we found examples in the most widely consumed foods for the most populous nation in the history of humanity.

Are economists free-market ideologists?

Yes, according to a recent article in the New York Times. Read the article's opening paragraph:

For many economists, questioning free-market orthodoxy is akin to expressing a belief in intelligent design at a Darwin convention: Those who doubt the naturally beneficial workings of the market are considered either deluded or crazy.

The brighter side is, according to the author, there is "a Growing Will to Debate Fundamental Assumptions."

Of course this is an overstatement. Even Dani Rodrik, himself quoted in the article as one of the 'outside-the-box economists,' agreed so.

The degree of disagreement among economists are greater that the article portrayed.Like religion, surely there are zealots or fanatics. And that can happen in any discipline, not just economics. (There are fanatics in the environmental science, gender studies, philosophy etc., are they?). But still many economists critically believe in market mechanism. That said, the 'debate over fundamental assumptions' have been consistently happening . Not just recently, as the article suggests.

And what happened to those who dispute the free-market fundamental assumptions? They (well, at least some of them) got the Nobel Prize, said Greg Mankiw:

Many economists in the past have questioned "free-market orthodoxy"--for example, Samuelson, Tobin, Modigliani, Solow, Sen, Stiglitz, Akerlof, Phelps,.... Does the economics profession consider these guys "deluded or crazy?" No, we give them Nobel Prizes!

And not all fields within economics are the same. For example, on how theoretical versus empirical they are, said George Borjas:

There are some fields in economics--for example, labor--that are heavily empirical. The voice of the data rules. There are other fields in economics that are much less empirical and have a much stronger tradition of theoretically derived prescriptions. For example, trade.

As for me -- maybe because I was trained in a School of Government (as opposed to the traditionan Econ Department) in the East Coast (as opposed to the 'freshwater' tradition), I used to see free-market believers argue for 'what is the right intervention to a specific problem.' Some people, like these guys, are even establishing their own 'sect' which aim is to calculate the impact of a certain intervention.

And, contrary to the common perception, nowadays it's harder to find free-market believers in this place.

Related stories:

• SBY's speech, a very bad one, about his catch on ideologies and economic systems.
• How a recent policy on public transport safety was a typical Chicago-school solution.

Great Forex-pectation (2)

(Continued)

Still along the lines of currencies and financial issues, a few days ago, I received another spontaneous question (during a wedding reception, of all places), “Is it true, what they’ve been saying, that there’s going to be another financial crisis? Isn’t one unfolding in Thailand right now, as we speak? Is it going to have a contagious effect again, thus spreading to Indonesia? What if the exchange rate shoots up to 20.000 IDR per USD? ”

Interestingly, this particular query hailed from someone who is an importer of sorts. To my understanding, she is about to sign a purchase order contract for a few years with a foreign supplier, but is concerned that the imported products might not sell very well at home, if there is a crisis that would prompt a significant increase in the prices of these particular goods.

To be honest, I had no ‘well-rehearsed’ analytical and comprehensive response to her query. This past year, my research mostly dwells on trade and regionalism issues, so yes, I’m a little rusty on my finance and monetary. Yet I still had the audacity to confidently respond to her, “No, Tante, I wouldn’t trust the ‘rumors’ so much. True, no one has control over financial crises, in fact history has shown that the financial crises-triggered panic are over the world [I was thinking of Charles Kindleberger’s classic: Manias, Panics, and Crashes : A History of Financial Crises], yet I would not bank on another crisis of a similar magnitude and depth as that of 1998. Yes, [short-term] shocks could happen, but as of this moment, I do not see that there is anything to worry about.” I paused for a moment, ”Not yet, at least!”

I based my argument mainly on two assertions/observations: (1) Macro and finance indicators suggest that Indonesia is now less vulnerable and (2) Authorities are now better equipped to deal with the crisis. A lot of (IMF-induced) financial reforms have taken place to restore the banking and finance sector, as well as set the scene for a more salient and prudent regulatory regime. Furthermore, East Asian countries have stepped up regional financial cooperation within the spirit of preventing the recurrence of the 1997/98 events. The crisis, interestingly, prompted a strengthening in the wave of regional financial cooperation. A lot has been discussed at the ASEAN Plus 3 (ASEAN + Japan, China and South Korea) Finance Ministers Level. A notable one would include a mulilateralization of Bilateral SWAP Arrangements known as the Chiang Mai Initiative (see here). ASEAN Plus Three Finance Ministers supported the idea of pooling their reserves as some kind of stand-by arrangements. The idea is that in the event of a liquidity crisis in a particular country, each central bank, according to how much it pledges, will release the funds to help the country experiencing liquidity problems.

Besides, I added, even if there is going to be another financial shock/crisis, the Rupiah would not depreciate by the same magnitude as it did in 1998. The pre-crisis level of 2,500 IDR per USD was undoubtedly undervalued overvalued, while the current level of 8,900-9,200 seems to reflect the ‘equilibrium’ more. Adjustments, if any, would not be as grave as before.

This particular query, delivered while I was ‘elegantly’ munching away on Poffertjes at the wedding, had the predicted effect of triggering my curiosity. Later on that night, when my mind was more free to contemplate, I thought more about all these currencies and crisis issue. Curiosity nearly killed the cat. I got to thinking, what lies behind all this recent worries about the likelihood of another crisis? Why now, ironically, when the region in growing again, such that it has been touted as the fastest growing region in the world (see Eichengreen’s commentary here)? What exactly is happening in Thailand right now? What are the financial and prudential indicators like: are we exhibiting signs of vulnerability? Are there signs that the fundamental macroeconomic and monetary conditions that preceded the 1997 crisis are now recurring?

An attempt to answer the above, and some insights on lessons-learnt from the Asian Crisis, are coming your way…Stay tuned…!