Kevin Murphy's Example

Here is an interview with one of my favorite economists, Kevin Murphy.

In my opinion, that interview gives you ideas on how economists, ideally, see and think about things. First, find interesting research questions and set it right. Second, stick to positive analysis.

See, for example, the discussion on smoking and drug addiction, and contrast it with the recent discussion amongst FEUI faculties on cigarette; you will find that Murphy never mentions normative statements on the issue --e.g whether smoking is morally a bad thing.

That is the economics as we in cafe salemba know it.

HT: Marginal Revolution

Presidential Summer Reading

If you were to recommend summer reading for Indonesian presidential candidates, what are two books you want them to read?

My recommendation:
#1. Capitalism and Freedom by Milton Friedman, to help them comprehend how market economy works, even if they eventually dislike it.
#2. Catcher in the Rye by JD Salinger, to remind them how being phony can be so sickening for others.

What's yours?

Stubborn General

Apparently our friend Sunaryo, the cafe's office boy, knows economics better than him.

And Sjamsu's headache remains.

Black-haired Capitalist

As expected, presidential election campaign produces some funny lingo. This one comes from the incumbent SBY who doesn't want the economy be dominated by global as well as black-haired capitalists.

What the hell does he mean by black-haired capitalist?

He would have been in better position if he said that he denounced the capitalists who asked for government protection to prevent market competition get into their way and punish their inefficiency. But calling these crooks black-haired capitalists doesn't help --if not puts him in, alas, the same league as his opponents in term of economic literacy.

The Pourers of Cold Water and The Clueless Cheerleaders

Sometime ago, Kate the manager asked me why economists are hated. She could not reconcile this fact with her own experience getting along with the baristas in this cafe, who, albeit, in her words, little bit chauvinists, are mostly harmless.

Today she told me that she finally got the answer from her summer reading of George Stigler's Memoirs of an Unregulated Economist. (Please note, with this pick of summer reading, Kate is now officially an econ geek)

Stigler wrote:

Why it has been fashionable to abuse economists (even granting the possibility that they may deserve it)? The main reason is easily named -economists have been the premier "pourers of cold water" on proposals for social improvement, to the despair of the reformers and philanthropist who support these proposals.

Thus, it is small wonder that in the midst of elections when promises of social improvements comes cheap as politicians exploit almost anything -from neoliberalism to, well, neoliberalism -; economists are more hated. Yet, the most depressing part is that many faux economists themselves are engaged in such futile promises, and call them economics. Instead of the pourers of cold water, they are bunch of clueless cheerleaders.

Bikin pusing..

Kadang bingung mendengarkan orang dengan keunggulan ilmu tertentu berkoar-koar di bidang ilmu lain, apalagi kalau dia mengusung poster/grafik.

Itu yang terjadi watu saya melihat interview LetJen Prabowo di TV-1 beberapa waktu lalu. Beliau klaim bahwa sistem perekonomian salah karena selama ini selisih antara penerimaan ekspor dan pengeluaran impor tidak tercermin dalam akumulasi kekayaan devisa kita.

Dengan benar, beliau bilang bahwa sejak dulu akumulasi cadangan devisa kita di Bank Indonesia tidak pernah naik dari US$50 milyar sekian.. Dengan bantuan latar belakang grafik besar, beliau juga tunjukkan angka surplus ekspor terhadap impor kita yang cukup besar. Bahkan, kalau saya hitung dari angka Neraca Pembayaran BI, surplus neraca perdagangan barang (balance of trade in goods) per-tahun dari 2004-2008 sebesar US$20 milyar, US$ 17 milyar, US$29.6 milyar, US$ 32.7 milyar, dan US$ 22 milyar.

Jadi, kalau mengikuti argumen Pak Prabowo, dari tahun 2004-2008 saja, seharusnya ada peningkatan cadangan devisa sebesar paling tidak US$120 milyar !! Sementara itu. .devisa yang dipegang Bank Indonesia, kok hanya US$50 milyar???

Lebih afdhol lagi, paparan tersebut dilengkapi dengan tudingan bahwa pemerintah (dan Bank Indonesia tentunya) tidak becus mengelola perekonomian.. Lebih runyam lagi pertanyaan seperti "dikemanakan uang rakyat", "bagaimana ini kekayaan kita dikuras", "sistem ekonomi apa ini" dsb.. ikut keluar.

Rasanya perlu diakui, pertanyaan Pak Prabowo amat sangat bagus. Tetapi perlu dijelaskan bahwa urusan cadangan devisa ini tidak segampang mengurangi dua angka ekspor minus impor dan kalau kurang dari itu berarti ada maling atau dicuri orang asing

Pertama, trade balance adalah bagian dari identitas pendapatan nasional (PDB) yang tidak dapat dibaca sepotong-sepotong. Trade balance bukan berapa yang seharusnya Indonesia dapat, melainkan bagaimana pendapatan Indonesia (PDB) dialokasikan ke dalam aktivitas berbeda (expenditure allocation). Jika ingin melihat berapa yang Indonesia dapat, maka perlu konstruksi PDB lewat pendekatan pendapatan (income approach) yang sampai sekarang kita belum punya (Indonesia punya 2 versi pendekatan PDB: expenditure dan value added)

Kedua, ya tidak segampang itu bilang kalau ada selisih besar antar surplus ekspor impor dengan cadangan devisa maka negara ini penuh maling atau diperkosa asing (diperkosa koruptor dalam negeri sih mungkin)

Devisa dari surplus trade balance masih harus ditambah atau akan dipergunakan oleh aktivitas-aktivitas lainnya.

Di Neraca Pembayaran, ada komponen Neraca Jasa (service balance) dan Neraca Modal yang mempengaruhi posisi akhir perubahan devisa kita. Neraca Jasa memperlihatkan surplus/defisit transaksi jasa seperti telekomunikasi, transportasi (naik Garuda atau SQ), cargo, bayar konsultan bule, dsb. Sepanjang yang saya tahu, Neraca Jasa Indonesia selalu defisit.

Kemudia ada Neraca Modal (capital account) yang memperlihatkan selisih modal masuk/keluar dalam bentuk penanaman modal tetap (Toyota buka pabrik, SingTel beli Telkom, orang Arab bikin hotel, Indofood buka pabrik di Afrika, Djarum buka pabrik di Brazil, dsb.) dan potfolio (surat berharga). Total dari trade balance, service balance dan capital account itu adalah secara teori adalah perubahan cadangan devisa (tentunya setelah penyesuaian karena kesalahan pencatatan dsb). Kalau pakai pendekatan ini, maka secara teoretis selama 2004-2008 Indonesia mengalami peningkatan cadangan devisa sekitar US$25 milyaran, bukan US$ 120 milyaran seperti klaim LetJen Prabowo

Belum tentu ada yang salah Jenderal, cuma itung-itungan Bapak belum tuntas saja

The Library As Big As The Ritz

I am truly glad that finally UI decides to seriously build the much needed library. I'd be even happier if it turns out to be bigger in size than the Rectorate building.

But, did the UI's deputy director of corporate communication say the largest library in the world? You kid me not.

How Neoliberal Confusing Are You?

Nicholas Kristof of The Times posed two nonpolitical questions to tell whether you are liberal or conservative.

#1. Would you be willing to slap your father in the face, with his permission, as part of a comedy skit?
#2. Does it disgust you to touch the faucet in a public restroom?

Conservatives would tend to say no and yes respectively, and liberals the otherwise. My answer is no and no. So what am I? Neoliberal?

But wait a sec, are we talking the same liberals here? Unlike in Indonesia, in the US, liberals turns out to be the ones on the left.

Boy, this is confusing. Give my summer break --and jalapeño ice cream-- back.

The Ghost of Neoliberalism

AP, at his best:

A specter is now haunting Indonesia: the specter of neoliberalism. I call it a specter, or ghost, because everyone is talking about it but few are really sure about what it is.

Neoliberalism is mainly referred to as a political economic system. However, for economists, it is not a common term to classify a set of ideas or policy orientation. One can find those claiming to be liberal, socialist, conservative, existentialist, Keynesian or neoclassical, who passionately defend the schools of thought they subscribe to, but I don't think there is anyone who considers her or himself a *neoliberal'. This is due to a feature of the so-called neoliberal philosophy: it is defined by its critics.

As the name suggest, neoliberalism is seen as the revival of Adam Smith's economic liberalism. The core philosophy of neoliberalism is that of liberalism: freedom for individual transactions, guided by market mechanisms where price is the signal to allocate resources based on demand and supply, minimum regulation and government intervention in the market, and the elimination of all barriers to exchange and trade.

So what is "neo" about neoliberalism? There is a spectrum of arguments raised by its critics. But they seem to converge on a couple of things.

more here

Et Tu, Jekus?

That was Kate's reply five minutes after I emailed her this JK's posting in his Kompasiana blog --with a snobbish show-off note saying "sent from Blackberry" at the bottom of her reply.

And she is right. JK's writing is a terrible example on how one misunderstands market economy, and coming from JK, the current VP and next presidential candidate, the inability to comprehend basic economics and the economy is even more depressing.

In his opening paragraph, JK argues that liberalization would put farmers into danger. But does he really think that most of Indonesians are rice farmers? For a presidential candidate, ideally he should be more knowledgeable on what most Indonesians are actually doing for life, so, if elected, will pick the policy benefiting the majority of people.

But is he up to expectation?

Your barista, Aco, coauthored a forthcoming paper on the political economy of rice and fuel pricing. There you'll find that 75 percent of total households in Indonesia do not grow rice and 82 percent are net rice consumers. Even in rural area, 63 percent of rural households are not rice growers and total around 72 percent of rural households are net consumers of rice

What does it have something to do with liberalization? If importing rice means lower rice price, at least 75 percent of national households and 63 percent rural households will benefit from that free market policy.

What to do with the rest? My take is two things: first, if import led them to fell down below poverty line, they deserve to get across the boards anti-poverty transfer, like direct cash transfer scheme --not because they are rice growers, but because they are now poor. Second, and more importantly, do not block their access to move into more dynamic sectors in the economy. And getting rid the obstacles they face means removing anti market competition policy like inflexible labor regulations, corruption, and lack of infrastructure.

In the second paragraph, JK thinks that in the international trade the developing countries are victimized as price takers, while the developed countries reap most benefits as price makers. Really?

Last year, as all of you know, there was a steep increase of the world's price of (primary) commodities produced by developing countries --like food and agriculture products. It would not have been the case if the developed countries, as the major consumers, could set or make the price as JK thinks.

But maybe JK is right, the current international trade of agriculture product is not fair because the developed countries as producers, and the competitors of developing countries, deliberately distort the market by applying high subsidy and trade barriers --in other words, violating free market principles. By that, here, what we want is, well, free trade so that we can sell our products and fairly compete in their markets too.

And on his remark that the price 1 kg of cocoa is far below the price of 1 kg of Silverqueen, what should I say? You just don't make one kg Silverqueen with one kg cocoa. You need to put some milk and mix it with other ingredients. Then you want to wrap them in in a nice package, advertise and distribute them to stores.

Still, you can not write your price tag as high as you want, if you still want somebody to buy your products. You need to consider the price of Ghirardeli, Toblerone, Lindt, Cap Jago, Haribo, Trebor, licorice, etc --all are your products' direct competitors -- as well as its indirect substitutes.

If you let market to work, your price reflects only normal profit, or some temporary supernormal profit that is always subject to natural creative destruction. It is not fair if you get government protection or commit in unlawful acts against your competitor. But you can not blame market mechanism for these faults, because what is unfair is the government discriminative anti-market protection.

Bottom line: it is rather unintelligent to support the argument for fairness by comparing cocoa's price to Silverqueen's and asserting an upside-down argument blaming market mechanism for the anti-market outcome.