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…

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.

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.

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.

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.

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.

Dynamism and Fertility

The American and Continental systems are not operationally equivalent, contrary to some neoclassical views. Let me use the word “dynamism” to mean the fertility of the economy in coming up with innovative ideas believed to be technologically feasible and profitable–in short, the economy’s talent at commercially successful innovating. In this terminology, the free enterprise system is structured in such a way that it facilitates and stimulates dynamism while the Continental system impedes and discourages it.

Wasn’t the Continental system designed to stifle dynamism? When building the massive structures of corporatism in interwar Italy, theoreticians explained that their new system would be more dynamic than capitalism–maybe not more fertile in little ideas, such as might come to petit-bourgeois entrepreneurs, but certainly in big ideas. Not having to fear fluid market conditions, an entrenched company could afford to develop radical innovation. And with industrial confederations and state mediation available, such companies could arrange to avoid costly duplication of their investments. The state and its instruments, the big banks, could intervene to settle conflicts about the economy’s direction. Thus the corporatist economy was expected to usher in a new futurismo that was famously symbolized by Severini’s paintings of fast trains. (What was important was that the train was rushing forward, not that it ran on time.)

Friedrich Hayek, in the late 1930s and early ’40s, began the modern theory of how a capitalist system, if pure enough, would possess the greatest dynamism–not socialism and not corporatism. First, virtually everyone right down to the humblest employees has “know-how,” some of what Michael Polanyi called “personal knowledge” and some merely private knowledge, and out of that an idea may come that few others would have. In its openness to the ideas of all or most participants, the capitalist economy tends to generate a plethora of new ideas.

Second, the pluralism of experience that the financiers bring to bear in their decisions gives a wide range of entrepreneurial ideas a chance of insightful evaluation. And, importantly, the financier and the entrepreneur do not need the approval of the state or of social partners. Nor are they accountable later on to such social bodies if the project goes badly, not even to the financier’s investors. So projects can be undertaken that would be too opaque and uncertain for the state or social partners to endorse. Lastly, the pluralism of knowledge and experience that managers and consumers bring to bear in deciding which innovations to try, and which to adopt, is crucial in giving a good chance to the most promising innovations launched. Where the Continental system convenes experts to set a product standard before any version is launched, capitalism gives market access to all versions.

The issues swirling around capitalism today concern the consequences of its dynamism. The main benefit of an innovative economy is commonly said to be a higher level of productivity–and thus higher hourly wages and a higher quality of life. There is a huge element of truth in this belief, no matter how many tens of qualifications might be in order. Much of the huge rise of productivity since the 1920s can be traced to new commercial products and business methods developed and launched in the U.S. and kindred economies. (These include household appliances, sound movies, frozen food, pasteurized orange juice, television, semiconductor chips, the Internet browser, the redesign of cinemas and recent retailing methods.) There were often engineering tasks along the way, yet business entrepreneurs were the drivers.

There is one conceivable qualification that ought to be addressed. Is productivity not finally at the point, after 150 years of growth, that having yet another year’s growth would be of negligible value? D.H. Lawrence spoke of America’s “everlasting slog.” Whatever the answer, it is important to note that advances in productivity, in generally pulling up wage rates, make it affordable for low-wage people to avoid work that is tedious or grueling or dangerous in favor of work that is more interesting and formative.

Of course, productivity levels in the smaller countries will always owe more to innovations developed abroad than to those they develop themselves. Some might suspect that the domestic market is so tiny in a country such as Iceland, for instance, that even in per capita terms only a very small number of homemade innovations would bring a satisfactory productivity gain–and thus an adequate rate of return. In fact, most of the Continental economies, including the large ones, have been content to sail in the slipstream of a handful of economies that do the preponderance of the world’s innovating. The late Harvard economist Zvi Griliches commented approvingly that in such a policy, the Europeans “are so smart.”

I take a different view. For one thing, it is good business to be an innovative force in the “global economy.” Globalization has diminished the importance of scale as well as distance. Tiny Denmark sets its sights on markets in the U.S., the EU and elsewhere. Iceland has entered into European banking and biogenetics. France has long done this–and can do more of it. But it could do so more successfully if it did not insulate its innovational decisions so much from evaluations by financial markets–including the stock market–as Airbus does. The U.S. is already demonstrably in the global innovation business. To date, there is an adequate rate of return to be expected from “investing” in the conception, development and marketing of innovations for the global economy–a return on a par with the return from investing in plant and equipment, software and other business capital. That is a better option for Americans than suffering diminished returns from investing solely in the classical avenue of fixed capital.

I would, however, stress a benefit of dynamism that I believe to be far more important. Instituting a high level of dynamism, so that the economy is fired by the new ideas of entrepreneurs, serves to transform the workplace–in the firms developing an innovation and also in the firms dealing with the innovations. The challenges that arise in developing a new idea and in gaining its acceptance in the marketplace provide the workforce with high levels of mental stimulation, problem-solving, employee-engagement and, thus, personal growth. Note that an individual working alone cannot easily create the continual arrival of new challenges. It “takes a village,” preferably the whole society.

The concept that people need problem-solving and intellectual development originates in Europe: There is the classical Aristotle, who writes of the “development of talents”; later the Renaissance figure Cellini, who jubilates in achievement; and Cervantes, who evokes vitality and challenge. In the 20th century, Alfred Marshall observed that the job is in the worker’s thoughts for most of the day. And Gunnar Myrdal wrote in 1933 that the time will soon come when more satisfaction derives from the job than from consuming. The American application of this Aristotelian perspective is the thesis that most, if not all, of such self-realization in modern societies can come only from a career. Today we cannot go tilting at windmills, but we can take on the challenges of a career. If a challenging career is not the main hope for self-realization, what else could be? Even to be a good mother, it helps to have the experience of work outside the home.

I must mention a “derived” benefit from dynamism that flows from its effects on productivity and self-realization. A more innovative economy tends to devote more resources to investing of all kinds–in new employees and customers as well as new office and factory space. And although this may come about through a shift of resources from the consumer-goods sector, it also comes through the recruitment of new participants to the labor force. Also, the resulting increase of employee-engagement serves to lower quit rates and, hence, to make possible a reduction of the “natural” unemployment rate. Thus, high dynamism tends to bring a pervasive prosperity to the economy on top of the productivity advances and all the self-realization going on. True, that may not be pronounced every month or year. Just as the creative artist does not create all the time, but rather in episodes and breaks, so the dynamic economy has heightened high-frequency volatility and may go through wide swings. Perhaps this volatility is not only normal but also productive from the point of view of creativity and, ultimately, achievement.

Ideals and Reality

I know I have drawn an idealized portrait of capitalism: The reality in the U.S. and elsewhere is much less impressive. But we can, nevertheless, ask whether there is any evidence in favor of these claims on behalf of dynamism. Do we find evidence of greater benefits of dynamism in the relatively capitalist economies than in the Continental economies as currently structured? In the Continent’s Big Three, hourly labor productivity is lower than in the U.S. Labor-force participation is also generally lower. And here is new evidence: The World Values Survey indicates that the Continent’s workers find less job satisfaction and derive less pride from the work they do in their job.

Dynamism does have its downside. The same capitalist dynamism that adds to the desirability of jobs also adds to their precariousness. The strong possibility of a general slump can cause anxiety. But we need some perspective. Even a market socialist economy might be unpredictable: In truth, the Continental economies are also susceptible to wide swings. In fact, it is the corporatist economies that have suffered the widest swings in recent decades. In the U.S. and the U.K., unemployment rates have been remarkably steady for 20 years. It may be that when the Continental economies are down, the paucity of their dynamism makes it harder for them to find something new on which to base a comeback.

The U.S. economy might be said to suffer from incomplete inclusion of the disadvantaged. But that is less a fault of capitalism than of electoral politics. The U.S. economy is not unambiguously worse than the Continental ones in this regard: Low-wage workers at least have access to jobs, which is of huge value to them in their efforts to be role models in their family and community. In any case, we can fix the problem.

Why, then, if the “downside” is so exaggerated, is capitalism so reviled in Western Continental Europe? It may be that elements of capitalism are seen by some in Europe as morally wrong in the same way that birth control or nuclear power or sweatshops are seen by some as simply wrong in spite of the consequences of barring them. And it appears that the recent street protesters associate business with established wealth; in their minds, giving greater latitude to businesses would increase the privileges of old wealth. By an “entrepreneur” they appear to mean a rich owner of a bank or factory, while for Schumpeter and Knight it meant a newcomer, a parvenu who is an outsider. A tremendous confusion is created by associating “capitalism” with entrenched wealth and power. The textbook capitalism of Schumpeter and Hayek means opening up the economy to new industries, opening industries to start-up companies, and opening existing companies to new owners and new managers. It is inseparable from an adequate degree of competition. Monopolies like Microsoft are a deviation from the model.

It would be unhistorical to say that capitalism in my textbook sense of the term does not and cannot exist. Tocqueville marveled at the relatively pure capitalism he found in America. The greater involvement of Americans in governing themselves, their broader education and their wider equality of opportunity, all encourage the emergence of the “man of action” with the “skill” to “grasp the chance of the moment.”

I want to conclude by arguing that generating more dynamism through the injection of more capitalism does serve economic justice.

We all feel good to see people freed to pursue their dreams. Yet Hayek and Ayn Rand went too far in taking such freedom to be an absolute, the consequences be damned. In judging whether a nation’s economic system is acceptable, its consequences for the prospects of the realization of people’s dreams matter, too. Since the economy is a system in which people interact, the endeavors of some may damage the prospects of others. So a persuasive justification of well-functioning capitalism must be grounded on its all its consequences, not just those called freedoms.

To argue that the consequences of capitalism are just requires some conception of economic justice. I broadly subscribe to the conception of economic justice in the work by John Rawls. In any organization of the economy, the participants will score unequally in how far they manage to go in their personal growth. An organization that leaves the bottom score lower than it would be under another feasible organization is unjust. So a new organization that raised the scores of some, though at the expense of reducing scores at the bottom, would not be justified. Yet a high score is just if it does not hurt others. “Envy is the vice of mankind,” said Kant, whom Rawls greatly admired.

The ‘Least Advantaged’

What would be the consequence, from this Rawlsian point of view, of releasing entrepreneurs onto the economy? In the classic case to which Rawls devoted his attention, the lowest score is always that of workers with the lowest wage, whom he called the “least advantaged”: Their self-realization lies mostly in marrying, raising children and participating in the community, and it will be greater the higher their wage. So if the increased dynamism created by liberating private entrepreneurs and financiers tends to raise productivity, as I argue–and if that in turn pulls up those bottom wages, or at any rate does not lower them–it is not unjust. Does anyone doubt that the past two centuries of commercial innovations have pulled up wage rates at the low end and everywhere else in the distribution?

Yet the tone here is wrong. As Kant also said, persons are not to be made instruments for the gain of others. Suppose the wage of the lowest- paid workers was foreseen to be reduced over the entire future by innovations conceived by entrepreneurs. Are those whose dream is to find personal development through a career as an entrepreneur not to be permitted to pursue their dream? To respond, we have to go outside Rawls’s classical model, in which work is all about money. In an economy in which entrepreneurs are forbidden to pursue their self-realization, they have the bottom scores in self-realization–no matter if they take paying jobs instead–and that counts whether or not they were born the “least advantaged.” So even if their activities did come at the expense of the lowest-paid workers, Rawlsian justice in this extended sense requires that entrepreneurs be accorded enough opportunity to raise their self-realization score up to the level of the lowest-paid workers–and higher, of course, if workers are not damaged by support for entrepreneurship. In this case, too, then, the introduction of entrepreneurial dynamism serves to raise Rawls’s bottom scores.

Actual capitalism departs from well-functioning capitalism–monopolies too big to break up, undetected cartels, regulatory failures and political corruption. Capitalism in its innovations plants the seeds of its own encrustation with entrenched power. These departures weigh heavily on the rewards earned, particularly the wages of the least advantaged, and give a bad name to capitalism. But I must insist: It would be a non sequitur to give up on private entrepreneurs and financiers as the wellspring of dynamism merely because the fruits of their dynamism would likely be less than they could be in a less imperfect system. I conclude that capitalism is justified–normally by the expectable benefits to the lowest-paid workers but, failing that, by the injustice of depriving entrepreneurial types (as well as other creative people) of opportunities for their self-expression.

[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.

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.

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.

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.