Aria PN

I agree with Milton Friedman’s assesment, but might disagree which choice is more important. Unfortunately Indonesia always only has one of them, if at all, to show for. For the next few years growth is more important than distribution. We can divide the pie once we have the pie.

The basic objectives, shared, I am sure, by most economics, are political freedom, economic efficiency, and substantial equality of economic power. Thes objectives are not, of course, entirely consistent…. I believe–and at this stage agreement will be far less widespread–that all three objectives can best be realized by relying, as far as possible, on a market mechanism within a “competitive order” to organize the utilization of economic resources…

ariapn Economics

Developing nations did not benefit from foreign capital. That’s what Dani Rodrik and Arvind Subramanian wrote in a new paper about financial globalization. Capital inflows increase consumption but their effect on investment and in turn productivity growth are minimal.

The paper builds from previous findings that countries that grow more rapidly are those that rely less and not more on foreign capital.

Of course developing nations need foreign capital. However, most of their government do not yet have policies and regulations necessary for increasing capital flows. Without those tools, foreign capital is risky and subject to a lot of corruptions. Unless the developing nations improve their governance, foreign capital is not that beneficial.

ariapn Economics

Ketidakpedulian terhadap politik bukan saja jamak, tapi juga rasional secara ekonomi. Sebab utamanya adalah usaha yang diperlukan untuk mendapatkan informasi politik tidak sebanding dengan imbalannya (Anthony Downs: An Economic Theory of Democracy). Apa arti satu suara dalam pemilihan dengan seratus juta suara. Kemungkinan satu suara tersebut untuk mempengaruhi hasil pemilihan sangatlah kecil.

Berbagai penelitian menyimpulkan bahwa pemilih menggunakan hak suaranya tanpa harapan yang rasional untuk mengubah hasil. Yang dia dapatkan adalah imbalan emosional. Mungkin kebanggaan karena dengan memilih dia menjalankan tugasnya sebagai warga negara. Atau perasaan bahagia karena sudah berusaha membantu rakayat miskin dengan program yang dipilihnya. Apakah program tersebut terlaksana atau tidak sangat kecil hubungannya dengan suara pemilih tersebut. Dan resiko (baik atau buruk) yang ditanggung oleh si pemilih atas pilihannya biasanya sangat kecil.

Mencari informasi politik itu mahal dan perlu usaha besar. Karena itu pemilih cenderung tidak melakukannya. Ini adalah apa yang disebut oleh Gordon Tullock (Public Choice Theory) sebagai “rational ignorance.” Topik ini dibahas panjang lebar oleh Bryan Caplan di buku baru tahun 2007, The Myth of Rational Voter. Pemilih sebenarnya tidak selalu rasional dalam menyalurkan suaranya. Mereka tidak mempunyai pemahaman yang benar terhadap berbagai topik (terutama ekonomi) yang sering diusung oleh kandidat.

Usaha untuk menambah pemahaman tentang kandidat memerlukan waktu dan juga pemikiran, bahkan terkadang biaya. Sementara keputusan yang berdasarkan emosi bisa dibilang gratis. Ini salah satu sebab hasil Pemilu tidak selalu mewakili kepentingan rasional pemilih. Sebab lain adalah karena sistem suara terbanyak tidak selalu bisa mewakili kepentingan sosial yang merupakan agregasi dari berbagai kepentingan individu (Kenneth Arrow’s Impossilibty Theorem).

Non voters think it’s not worth their while to physically go through the process of voting because their votes won’t make any difference, statistically speaking. Some of them don’t vote because they want to make informed decisions and the cost to get and process that information is more than the expected benefit.

On the other hand, most people who vote are politically ignorant. But this is done rationally. They choose to be ignorant because to be politically informed takes effort. They still go to voting booth because they get rewarded by feeling good having done their civic duty, trying to save the environment, helping the poor or whatever. That feeling is a reward, but not a big reward. So they spend some effort, but not that much that they become well informed. If the reward is bigger they’ll probably be more informed.

Apakah ini berarti demokrasi gagal? Bukan gagal, hanya tidak sempurna. Seperti dikatakan Churchill, “Democracy is the worst form of government, except for all those other forms that have been tried from time to time.”

Karena manusia ini makhluk rasional, maka ketidakpedulian-nya-pun harus dirasionalisasi. Jadi pemilih tidak akan mengakui bahwa mereka tidak tahu banyak tentang kandidat, tapi cenderung mengaku sudah lebih tahu. Bahkan mereka merasa ketidakpedulian itu suatu kebaikan, misalnya dengan menganggap bahwa politik itu kotor.

ariapn Bahasa, Economics, Politics

Tulisan menarik dari Dani Rodrik (Professor Harvard) tentang pengembangan ekonomi. Sumber masalah dalam pengembangan ekonomi bisa dikelompokkan dalam 3 macam:

1. Kurang sumber daya. Solusi cepatnya adalah dengan mencari bantuan dan pinjaman luar negeri.
2. Kurang insentif yang menghasilkan kompetisi. Solusinya adalah bebaskan pasar lewat deregulasi dan privatisasi.
3. Kinerja pemerintahan yang tidak optimal karena berbagai hal, misalnya korupsi atau sistem yang tidak mendukung.

Saya melihat Indonesia memiliki ketiga macam masalah tersebut dan saling berkaitan. SDA perlu dikelola lebih baik dengan perbaikan pasar dan instansi pemerintah yang terkait. Pendidikan adalah kunci perbaikan SDM, walaupun akan memakan waktu panjang. Perbaikan SDM ini nantinya akan menghasilkan pemerintahan yang lebih baik.

Rodrik juga menulis tentang pendekatan baru dalam melihat permasalahan ini. Sesungguhnya kita tidak tahu di mana permasalahannya, apalagi apa pemecahannya. Kuncinya adalah eksperimen kebijakan. Di sini memang dibutuhkan kemauan politik yang besar, karena kebijakan yang diambil akan berpengaruh terhadap banyak orang.

Pemerintah harus selalu siap membatalkan suatu kebijakan kalau itu suatu kesalahan atau memperbaikinya. Kita bisa ambil contoh kenaikan harga BBM karena dicabutnya subsidi pemerintah. Pembuat kebijakan harus melihat apakah tujuannya tercapai, yaitu mengurangi konsumsi BBM dan menekan defisit anggaran. Apakah redistribusi subsidi lewat bantuan langsung tunai berhasil membantu?

Pendekatan seperti ini memerlukan kedewasaan rakyat terhadap pokok permasalahan dan pembuat kebijakan untuk meyakinkan.

ariapn Bahasa, Economics

From the August 2007 issue of Scientific American Mind

Is Greed Good?

Economists are finding that social concerns often trump selfishness in financial decision making, a view that helps to explain why tens of millions of people send money to strangers they find on the Internet

By Christoph Uhlhaas

Could you buy a used car online, sight unseen and without a test-drive? How about a plane? A vehicle changes hands on eBay Motors every 60 seconds, including one private business jet that sold for $4.9 million. Every second buyers collectively swap more than $1,839 for products through eBay, sending money to complete strangers with no guarantee that the goods they buy will in fact arrive, let alone in the condition they expect.

As a rule, they are not disappointed. To some economists, this is a borderline miracle, because it contradicts the concept of Homo economicus (economic man) as a rational, selfish person who single-mindedly strives for maximum profit. According to this notion, sellers should pocket buyers’ payments and send nothing in return. For their part, buyers should not trust sellers—and the market should collapse.

Economist Axel Ockenfels of the University of Cologne in Germany and his colleagues have spent the past several years figuring out why this does not happen. It turns out that humans do not always behave as if their sole concern is their personal financial advantage—and even when they do, they consider social motives in the profit-making equation. As Ockenfels has discovered, a sense of fairness often plays a big role in people’s decisions about what to do with their money and possessions, and it is also an essential part of what drives trust in markets full of strangers such as eBay.

Ockenfels’s Equity, Reciprocity and Competition (ERC) theory, which he developed with economist Gary Bolton of Pennsylvania State University, states that people not only try to maximize their gains but also watch to see that they get roughly the same share as others: they are happy to get one piece of cake as long as the next person does not get two pieces. This fairness gauge apparently even has a defined place in the brain. On eBay, however, fairness takes the system only halfway, researchers have now learned; eBay’s reputation system is critical for augmenting the level of trust enough for the market to work.

Circumstance also sculpts behavior, studies have revealed, regardless of natural character traits or values. That is, whether a person is competing in a market of strangers or negotiating with a partner can make a big difference in whether fairness, reciprocity or selfishness will predominate. In fact, the ERC theory hints at ways to alter economic institutions to nudge people to compete—or cooperate—more or less than they currently do.

Playing Fair
Economists have long been studying volunteers in the laboratory to determine how and why they make financial decisions. In competitive markets, from the U.S. Stock Exchange to auctions at Sotheby’s, people generally act like Homo economicus, behaving in ways that maximize their own profits.

But inherent selfishness cannot explain behavior in other settings. Take a child who has been given a bag of jelly beans, which her left-out sibling is eyeing jealously. Many children would voluntarily share the candy just to be fair, even though that would mean fewer jelly beans for them. Mathematicians who practice game theory see something similar when they ask people to bargain in a test of social motives called the Ultimatum Game. In this two-player game, player A is endowed with a certain sum, say, $20, if he agrees to share some of it with player B. If B accepts A’s offer, the money is divided accordingly. But if B rejects the offer, both players end up with nothing.

In Ultimatum Game studies, researchers have found that the average offer is about 40 percent of the sum and that the most frequent split is 50–50, analogous to a child giving her sibling half or nearly half of the jelly beans she received. The recipient, B, usually accepts such roughly equal offers. When A offers less than one third of the total, however, B usually reacts with scorn and scraps the deal. This response seems nonsensical to someone who is only out to maximize profit. But it is more logical if people have a competing social concern: fairness. If individuals want a fair split, then accepting significantly less than that would mean forfeiting that objective.

A motivation for fairness also seems to be an important factor on eBay, in which the “Buy It Now” format—or an auction with just one buyer—resembles an Ultimatum Game; a seller offers an item at a price that a buyer can accept or reject. To test this hypothesis, Ockenfels and Bolton recruited 100 German university students with selling experience on eBay, divided them into 50 buyer-seller pairs, and asked the sellers to hawk $20 certificates (funded by the researchers) to their assigned partners on eBay.

Consistent with previous Ultimatum results, the most popular selling price was $10, which would result in an equal split of the experimental pot. All but one buyer accepted this offer. Prices above $17 were uniformly rebuffed as too greedy, and some also refused costs between $10 and $17, refuting the idea that monetary incentive alone governs the deal. On the contrary, in this bargaining situation an equal split maximizes profits, Ockenfels says, because buyers generally will not accept unfair offers and sellers seem to realize that. “Fair dealing pays off,” he concludes.

Different Strokes
In many cases, however, people will forgive a biased outcome if it comes about by chance rather than through a deliberate act. Ockenfels and Bolton recently asked volunteers to play an Ultimatum Game variant in which player A chooses to split the money either 50–50 or 80–20. If the choice was 80–20, 41 percent of recipients refused the offer. But only 7 percent rejected the 80–20 split when it came from a robot acting at random. This result, Ockenfels says, suggests many people will accept unequal deals as long as all participants have been given a fair chance.

Not everyone is the same, of course. The demand for such procedural fairness, in which people get equal treatment even if the outcome is unfair, may have a cultural component. Anecdotal evidence suggests, for instance, that Americans may be more concerned with procedural fairness than Germans are. Germans seem more likely to insist on equivalent outcomes, Ockenfels says. Individual differences matter, too. Some people are very sensitive to being cheated, whereas others are far less bothered, even nonchalant, when they receive unequal treatment.

That said, discerning values from behavior is often hopelessly confounded by circumstance, Ockenfels says. When he and Bolton asked people to compete for their $20 certificates in experimental eBay auctions with one seller and nine buyers each, they found that the selling price zoomed above $19, a far cry from the equal split that pervaded the previous one-on-one game. Homo economicus trumped fairness in the auction, because a fair player has no way to strive for equity in a situation in which each person must overbid the others to get anything at all. “In markets, all people behave selfishly, but that doesn’t mean they really are,” Ockenfels comments. “The institutions make you behave in certain ways.”

Building Trust
In the researchers’ experimental auction, trust was not a factor, because the (presumably trustworthy) experimenters vouched for the $20 certificates. Yet trust is a critical issue on eBay, in which sellers are anonymous and have little pecuniary incentive to actually ship the items they have sold.

To figure out why they ship anyway, Ockenfels, Bolton and Penn State business professor Elena Katok asked 144 university students to play a trust game that mimics the situation on eBay. In the game, a seller and a buyer each start off with the same sum, say, $35; that is the payoff when no trade takes place. The seller also has an item to be sold for $35, but its value to the buyer is $50, so a trade nets the buyer an extra $15. The seller pays the shipping costs here, $20, so a trade also nets the seller an additional $15. But if the seller fails to ship an item, the seller receives a $35 bonus and the buyer loses the entire endowment. If the buyer chooses not to take this risk, no trade occurs.

In this game, the outcome is fair after either a successful trade or no trade—but most advantageous to the seller if the seller fails to ship. Homo economicus would thus never ship, and no rational buyer would buy. But 37 percent of the sellers were willing to ship, the researchers found, suggesting that some sellers were motivated by an intrinsic sense of fairness and some buyers had bet on that. And in a modified trust game that endows the buyer with an extra $70 regardless of the outcome, the researchers predicted that fair-minded sellers would not ship, because that choice would equate buyer and seller sums at $70. As expected, many fewer sellers (only 7 percent) decided to send the fictitious goods, signifying that the main reason for trustworthiness is fairness.

Rumor Has It
Nevertheless, sellers must ship as much as 70 percent of the time for buying in such a game—or on eBay—to be profitable, according to Ockenfels. How does eBay boost trust to that level? The answer: feedback. On eBay, sellers and buyers can evaluate one another after a transaction has been completed, and these evaluations are made public for future buyers and sellers. “This reputation system functions like an organized rumor mill and replaces the gossip systems of the off-line world,” Ockenfels explains. Because a bad reputation scares off future buyers, even strategic and rational sellers have an incentive to be trustworthy.

To quantify the power of this rumor mill, Ockenfels and his colleagues compared market activity among strangers matched for 30 rounds of transactions without a feedback mechanism against a similar market that included feedback. They found that the feedback system elicited ­significantly more buying—56 percent—as ­compared with buying without it—37 percent. More shipping also occurred, rising to 73 percent—above the threshold for trust to be profitable—as compared with shipping for tran­sactions without the reputation system: these hovered around 39 percent. The results indicate that feedback can fill the trust gap in a market such as eBay’s, multiplying the impact of intrinsic trustworthiness.

But the feedback system is imperfect. About 98 percent of ratings on eBay are positive, according to Ockenfels, suggesting that some disappointed eBay buyers do not post negative ­ratings. Buyers may fear “revenge feedback,” when a seller retaliates for a bad rating with a negative rating of the buyer, claiming that the buyer paid late or with a bad check, for instance. Indeed, in Ockenfels’s experiments, many of those who are not happy with a trade do not give feedback at all.

This lack of feedback is obviously not good for the reputation system. So Ockenfels and Bolton, along with economist Ben Greiner, now at Harvard University, have been working with eBay to design choices that induce people to post truthful and detailed negative feedback. eBay’s revised format, Feedback 2.0, debuted April 30. It lets buyers rate transaction specifics such as accuracy of an item’s description, seller communication and shipping speed, in addition to the overall rating of positive, neutral or negative.

The extra detail increases the feedback’s value to future buyers. And to help allay worries of retaliatory feedback, buyers give their ratings anonymously. Furthermore, sellers can see the detailed ratings only after providing feedback of their own, preventing retaliatory feedback even if the seller later intuits which buyer posted a poor evaluation. What the new system cannot prevent, however, is one-time cheaters. Buying a car or plane online is still pretty risky.

Ockenfels is not about to do that. He visits eBay only occasionally, to buy things for his two children. And if you notice an auction with “aockenfels” as the seller, you have probably stumbled on an economics experiment.

ariapn Economics

Mr. Phelps, the McVickar Professor of Political Economy at Columbia, was yesterday awarded the 2006 Nobel Prize for economics.

Dynamic Capitalism by Edmund Phelps in the Wall Street Journal: There are two economic systems in the West. Several nations–including the U.S., Canada and the U.K.–have a private-ownership system marked by great openness to the implementation of new commercial ideas coming from entrepreneurs, and by a pluralism of views among the financiers who select the ideas to nurture by providing the capital and incentives necessary for their development. Although much innovation comes from established companies, as in pharmaceuticals, much comes from start-ups, particularly the most novel innovations. This is free enterprise, a k a capitalism.

The other system–in Western Continental Europe–though also based on private ownership, has been modified by the introduction of institutions aimed at protecting the interests of “stakeholders” and “social partners.” The system’s institutions include big employer confederations, big unions and monopolistic banks. Since World War II, a great deal of liberalization has taken place. But new corporatist institutions have sprung up: Co-determination (cogestion, or Mitbestimmung) has brought “worker councils” (Betriebsrat); and in Germany, a union representative sits on the investment committee of corporations. The system operates to discourage changes such as relocations and the entry of new firms, and its performance depends on established companies in cooperation with local and national banks. What it lacks in flexibility it tries to compensate for with technological sophistication. So different is this system that it has its own name: the “social market economy” in Germany, “social democracy” in France and “concertazione” in Italy.

Read more…

ariapn Economics

[I]t is a uniquely modern belief that politics will totally change our lives and redeem us, or that the existence of the correct political structure can cure ‘the problems of society’. This belief in the salvational quality of politics, as has been noted by John Gray, is dying or already dead in liberal societies (to be replaced by the ‘cult of science and technology’ according to Gray). One can’t help but agree with Dr. Yahya Michot, when he said … that too many Muslims, having concentrated on politics to the exclusion of almost everything else, ended up “backing the wrong horse” in the 20th-century (especially if one considers that, according to Michot, economics has trumped politics). It is the modern idea of fascism that says the state must control and define all activities of its citizens: the economic, the political, the social, the legal, the cultural and even the metaphysical. It is people who reduce Islam to nothing more than a bid for power, a method and an end of governance, that will actually end up secularising Islam.

From Thabet. I hope I can elaborate more on this, for now this will serve as a place holder.

ariapn Economics, Politics

That’s the solution I was proposing in my last post. Free market to get the most benefits and transfers to redistribute them accordingly. One important issue about redistribution is generality versus transparency. Do we redistribute the benefits universally or selectively but transparently? Will Wilkinson expands more on this. This problem in particular is really evident in Indonesia:

Part of the issue here is a big principle-agent/incentive compatibility problem between representatives and the citizens they represent. Politicians want to get re-elected. If they can subsidize interest group A at group B’s expense without group B really noticing due to the hidden transfer, then that will sound like a real winner to a politician. Which is just to say that the incentives politicians face encourage them to violate the very conditions of transparency and public justification that make their coercive powers legitimate.

ariapn Economics, Politics

Idealistic view of the world has bothered me a lot recently. But you’ll see why you can’t be without ideals. So let’s try another approach, or what I’d call “the” approach. Rather than looking at specific issues, we’ll just put them all in one basket and be super-solver for now.

Assume the idealistic view is right in that Indonesia has a lot of resources, and the realistic view is right in that we (or maybe “others”) have mismanaged the resources. The opposite assumptions are too disheartening; that somehow we are good managers, but don’t have the capital to work at. We’d rather be rich than competent right?

We have our problem: how do we manage our resources? There might not be a first best solution to this problem. I don’t care. Give me a second best then. Give me the most efficient solution possible taking into account all conditions.

Efficiency is measured in terms of utility. It’s efficient if you cannot increase the utiliy of one party without decreasing the utility of the other party. Utility is just economic term for ideals. It means your preference, your likes and dislikes, and ultimately your ideals, what you want and value the most. Without ideals, there’s nothing to improve or aim for.

If we start from this solution, the question is always about distribution, who gets the benefit (and how much) of that efficient solution. If I start from the other end, the question is about efficiency.

OK, the next step is to distribute the benefit so everyone can be happy. Wait, that’s not possible. Maybe we can try distribute it fairly, so no one can’t complain of injustice. (What? Did you say they can and will complain because they have different definition of fair and justice?) It doesn’t really matter, but I’ll just use Rawls’ arrangement of fairness (which is probably the view of the more idealistic camp). So, the least advantaged of the society should get the greatest benefit.

Let’s also assume away the details of actually implementing this principle, such as proportions, measurements, etc. So we want to give more benefits to some and reduce or take away from others. The latter will then lose some or all of the incentives to contribute efficiently. That means there’ll be less benefits to distribute. Even less than ideal, we might already have something better than what we have in the beginning. We might also we end up where we start, a very non optimal outcome.

I realize this has been rehashed before so many times, by so many people much more competent in this than me. I don’t have “the” solution. I’m just pointing out the realities. Knowing them, we won’t get carried away by too idealistic of a solution. Especially if it sacrifices a lot more benefits than what we have to.

We have rooms to improve. Often times we are afraid to improve, because the distribution will change. Don’t forget, once we get the benefits, we can always redistribute them if we wish so. Of course there’s always the price for being less efficient. It’s not perfect. Pick your poisons, and choose them wisely.

ariapn Economics, Politics

The debate about BLT and its effectiveness gets me thinking. Probably, one of the most common mistake of policy making by populist-leaning decision makers is to generalize a micro experience and mold it into a macro policy. Of course it doesn’t have to be a first-hand experience. With the social and geographical gaps so wide, the number of personal experiences is small anyway.

The main culprits of influence are the news media through no fault of their own. The common “dog bites man” phenomena won’t make any news headlines. Instead, a compelling experience, especially if there are several similar ones, gets repeated through news cycle by different media. After a while the exception becomes the rule.

It goes without saying that exceptions are important in making decisions. Rawls would say that the policy should be designed to benefit the least-advantaged the most. I concur, if those benefits are weighed against the costs “properly” for everyone over period of time (not just here and now). Proper analysis can be done through accurate data gatherings and honest statistical readings.

ariapn Economics, Politics