The Chronicles of a Capitalist Lawyer: Economics

Showing posts with label Economics. Show all posts

We all know the familiar phrase “may the best candidate win” in an election process. Obviously, we really hope that we can get the best leader through such process. Yet in reality, we often fall into a situation where the entire candidates suck and we are forced to vote for the best among the worst, which is still bad.

Have you ever wondered why most of the time, getting the best from the bests as our leader is very difficult? Is it actually possible for us to use a meritocratic system where leaders are chosen solely based on their capabilities? The answer might be disappointing.

The main problem? We tend to forget that in the modern world, leadership is neither simply a right nor a privilege; it is a job with certain responsibilities. There are costs and benefits involved. Thus, the law of supply and demand will govern the process.

Those who want to be leaders do not necessarily have the needed capabilities. Most of them, if not all, are people who believe that the overall benefits of being a leader are higher than the total costs.

Of course, the hopeful leaders might have been wrong in projecting their victory. We’ve seen cases where unelected officials went berserk due to the stress caused by their failure. But that does not matter.

The most important thing is that when they chose the path of leadership in the first place, they were convinced that it would be good for them. Whether it would also be good for other people is a bonus. It would only matter when there is a strong connection between the leader’s performance and his future electability or the security of his current position.

This is the primary cause for our difficulties in finding the best leaders. We can’t simply assume that these leaders would be purely motivated by altruism or that they will serve the people just for the sake of being a good leader.

Even worse, the problem would be amplified when the requirements of getting as many votes as possible are significantly different with the requirements for becoming a leader itself. The differences may vary around the world but they do exist.

That would mean that each candidate will need two different set of skills: the skills to be elected and the skills to lead. In practice, these two set of skills are different. Thus, we see people who become politicians and those who become technocrats.

Not everyone, unfortunately, is blessed with both skills. There are many situations which may affect the possibility of a candidate to become a leader and give one set of skills a better advantage over the other.

Track record of leadership is one example. No one knows exactly how a person can be an effective leader without first knowing his track record of past performances. However, in a situation where the track record is unclear or hard to know, the skills for attracting voters would be more important than the skills to lead.

In countries where information about candidates is not widely distributed - unless you have a lot of money - the costs for candidates with good leadership skills but less vote gaining skills would be too high.

In case these people - who are actually fit to be the best leaders- believe that joining the election race does not worth their time because they don’t have enough skills to be elected, we are doomed.

With less good people, the market of leaders will be oversupplied with bad candidates who know how to attract votes. While at first people might vote for them, sooner or later people will know their leaders true quality.

The problem is, if these bad leaders create a cartel to maintain their position - since they are in power anyway - the chances of having new good candidates would decrease. This will trigger more apathy from rational voters to participate in the election and we will end up in a vicious circle until God knows when.

Of course, I do not want to write an entirely gloomy article. A single tiebreaker can actually end the above vicious circle. The case of the latest regional election in Jakarta might be a great example.

I believe that the existence of independent candidates who have some vote attracting skills - though have no chances of winning - opened the possibilities for Jakarta politicians to break up their cartel and pursue a chance to win the election for themselves, which give opportunities to the citizens to choose other candidates.

At this stage, I do not know whether the election result would be beneficial for the citizens, but I am happy to see that there is a practical solution to break the vicious circle without having to conduct a revolution.

Around two weeks ago, I had an opportunity to attend a debate on Neoliberalism Thought at the University of Chicago between Gary Becker (Professor of Economics at the University of Chicago), Bernard Harcourt (Professor of Law and Chair of the Political Science Department at the University of Chicago) and François Ewald (former assistant to Michael Foucault and Professor of Insurance at Conservatoire National des Arts et Métiers, Paris). I think the quality of the debate is very good and it would be a pity if I don't share the ideas raised in such debate in this blog.

First of all, the debate spins on the idea of Homo Economicus or the Economic Rational Men by Gary Becker. Michael Foucault, a famous French philosopher and historians, believe that Gary Becker's idea on economics rationality provides the necessary theoretical foundation of Neoliberalism. This is interesting because usually Neoliberalism is more associated with political economic thoughts rather than pure theoretical economic thought.

I think even most of the time, when Indonesian people talk about Neoliberalism, they think about the idea of excessive free market, non governmental intervention, injustices by corporations and dictators, etc. Of course, I heavily doubt that this is the correct interpretation of Neoliberalism since pure Capitalism does not support any crony capitalism, dictatorism, business without liabilities, and so on. See my previous post on this issue here.

For now, let us return to Foucault ideas. He is a proponent of the idea that history is determined by the power relationship that controls men. Law and morality are things that are defined by those who have power and authority, and therefore they might be simply an illusion for the society. However, Foucault finds some consolations in Gary Becker's concept of Homo Economicus, which according to him is liberating.

Gary Becker, which is also a Nobel Laureate, is the proponent of idea that the science of economics can be used as a powerful tool to analyze almost all, if not all, of human behavior and activities. He introduces the use of economic analysis on crime, family and discrimination and is also considered as a part of Law and Economics development at the University of Chicago.

Within Becker's theory, human is viewed as a rational being that always wants to maximize his own interest. It does not mean that human has a perfect capacity of calculating the entire costs and benefits of his action. It simply means that when they are making their decision, they pay attention and respond to incentives, and thus, to certain extent, human behaviors are predictable.

A separate note though, even Becker agrees with Foucault that a perfect rational men is a fictional concept. What matters is that the theory is useful to understand the world in an insightful way by taking certain aspects of human behavior and make a simple model. After all, all theories are fictions, and a good theory of fiction is the one that works the best among many other fictions.

Then, why this kind of theory is liberating? According to Foucault, economists are seekers of truth, their analysis is not based on moral or legal issues, rather they focus on human behavior and incentives, and they also prioritize liberty (through free market concept). This is important for Foucault who sees the possibility of maintaining order without any coercion or doctrine as presupposed by laws and morality.

But the Neoliberalism view of Gary Becker is not totally free from any problem. Although it may be a liberating theory it can also be used to suppress the people and here we are moving to Gary Becker theory of Human Capital which is an essential part of Neoliberalism. Becker believes that human capital is very important, i.e. investing in people, making them to be a better and more productive person which will contribute to the welfare of the society.

The problem with that view, at least according to Harcourt and Foucault, is that once human is viewed as a part of capital, the government may favor certain group above other groups, discriminating and investing only in people who will produce the highest benefits and left the ones who are bad to suffer in the slumps. An example would be the case of mass incarcerations in the United States that target most of African Americans and poor people based on various criminal actions. Eugenics can also be a problem here since there was a time where the Government of US actually allow the sterilization of imbeciles and people with mental disorders.

Furthermore, viewing human as only a part of capital production could be degrading, i.e. human is viewed like a machine with the sole purpose of producing more capital and whose value is solely determined on how much capital will be produced and accumulated by him in the long run. I take this as the modern critics of Neoliberalism and Capitalism in general.

Becker's response was simple. His theory on human capital is established to liberate the people and while he agree that some aspects of economics theory on production and capital can be used to analyze issues on human capital, human capital is still a separate subject (and thus the reason why he makes a separate class on human capital in the University of Chicago).

From any point of view, human cannot be fully compared with machines. We can put machine in the warehouses and easily disassemble them whenever we want, we can't do that with human. Furthermore, the theory put a lot of stress in building human capital so that everyone may reap the benefit of social welfare. It includes investment in education, on the job training, health, etc.

The most interesting response from Becker is that his theory of human capital focuses on efficiency, but most of the time, things that are efficient, are also equitable. Through his theory, Becker want to show that human is the most important part of our capital. By investing in people, we hope that they can develop themselves and free to make their own life decisions without any interference. He also notes that there is an underinvestment in poor people and that is actually an inefficient thing to do, since better human capital always lead to better welfare maximization.

I completely agree with Becker's notion. This is indeed the main purpose of introducing the concept of human capital, preserving freedom and reducing paternalism, finding the most efficient way to allocate resources among the people. And I think this should be the main idea of Neoliberalism. It is just too bad that politicians and even some academics are using this concept in such a misleading way that they confuse the original concept of Neoliberalism that focuses on liberation and freedom of the people with crony capitalism, dictatorism, and the freedom to do anything without any legal liabilities which are not even parts of original concept of Neoliberalism.

A couple of days ago, a notorious organization disrupted a health charity event, demanding the event be stopped on the basis that it might be related to the spreading of a certain religion. Their claim was simple, if the event was made to spread religious beliefs, it will cause social unrest within the nearby community.

I find such arguments to be completely unreasonable. It not only shows that the organization does not understand the basic concept of spreading of religion, it also interferes with events that might increase the welfare of society and therefore are beneficial from a legal and economic perspective.

Under Islamic law, one of the valid recipients of "zakat" is "muallaf." These are the people who have just converted to Islam and therefore need to be given more incentives to maintain their faith. In other words, Islam publicly recognizes and validates the use of economic incentives to gain more followers.

The fact that Islam allows the use of economic incentives means that other religions should also be permitted to do the same, and in case Muslims are concerned with the spreading of other religions via economic means, they should also fight back using the same measures. It would be very beneficial to people who are in need if religious organizations compete among themselves to increase their charity spending in order to gain new followers.

Interestingly, people often want to separate economics from religion, fearing that combining them will taint the religion’s sanctity and that it will look very bad in front of God. Again, that is nonsense. In reality, every religion always plays with incentives. And I am quite confident that the general concept of religion is compatible with the notion that humans are rational and will always try to maximize their self-interests, even though they might not be very good in assessing the costs and benefits of their actions and in assessing future risks.

Let us first begin with the concept of heaven and hell. All major religions have such a concept in their teachings. If you always act good or at least the amount of your good deeds outweighs your bad deeds, you will go to heaven with all of its benefits. Meanwhile, if you end up doing more bad deeds, you will go to hell with all of its scary tortures. Like it or not, heaven and hell are the perfect examples of how religions use economic incentives to shape people preferences.

There is a follow-up question though: if people are really rational, how could they still do bad deeds? I have discussed this issue in my previous article, “On Why Religiosity Has not Translated Into Better Legal Compliance,” so I will not discuss it here. But you don’t need to worry, it won’t change my analysis in this article.

Some religious followers believe that the highest level of piety is to act not because of the promise of benefits and punishment by God, but simply because they love God and they want to receive the grace of God. However, it does not necessarily mean that such courses of action are free from economic realities.

These people realize that doing the above will increase their level of religiousness in front of God. Furthermore, the satisfaction that they receive from reaching such a level also maximizes their value. In short, to the extent the benefits outweigh the costs (since it is not easy to reach this level), it is absolutely rational for religious people to chase the grace of God.

Sufi followers desperately train themselves to get rid of individualism by doing religious activities. Yet, I have not uncovered any successful incidents of cleansing our minds of the idea of getting maximum rewards for pleasing God. Deep in our minds, we realize that if we can please God, it will be beneficial to us, even if we don’t expect heaven. We are still bound by our interest in maximizing our rewards.

And there are many good examples of economic incentives and the notion of individuality in religion. Helping other people is not mandatory, it is encouraged unless you are talking about people that are legally dependent on you. Islamic law also recognizes the concept of "fardu kifayah" for more urgent issues that need collective action. This means that the responsibilities of the faithful of a religion are collective. Once one person satisfies the required obligation, the others will be released from any liability of sin.

Having said that, I think religious people should embrace economic realities in their lives and start to contribute to the betterment of society. It is the original goal of religion anyway and would produce the best result for all of us.

Since I call myself the Capitalist Lawyer, it's hard for me to resist the temptation of enrolling in one of my law school's courses: Law and Political Thought - Neoliberalism and Its Critiques. After all, I always believe that you can't properly learn a thought if you don't learn its critiques. One of the required readings in this course is Naomi Klein's book, the Shock Doctrine. The basic idea of her book is that the globalization of neoliberalism is primarily caused by the shock doctrine, where neoliberalism supporters use a crisis in a particular place in the world to spread their ideology in an effective way, ensuring that the changes can be made in a massive scale and that such changes would be almost irreversible once they are established as governmental policies.

To add the spices, the book also shows how the shock therapy is administered to various part of the world such as Chile (Auguste Pinochet case), Iraq (the oil companies saga), Asia tigers (the 1997 crisis where Indonesia was part of the victims), China (Deng Xiaoping reformation and the Tiananmen Square) and also England's liberalization (under Margaret Thatcher rule). Furthermore, she also believe that all of these disasters were caused by the idea of Milton Friedman, the famous economist from the University of Chicago. Milton Friedman who was very famous for his teaching on the power of freedom, free market and limited government was blamed as the prime perpetrator of neoliberalism. He was also quoted as the guy who first started the idea of using crisis as a way of spreading ideology.

I must say that reading her book, I am not convinced that there is a strong relationship between the idea of Milton Friedman and the administration of the shock doctrine. It seems that most, if not all, of her critiques and evidence used in the book are precisely not a part of Milton Friedman teachings, nor should they be considered as a part of the original idea of neoliberalism. I would say that she has mixed neoliberalism with corporatism and/or crony capitalism which should be rejected from any point of view.

First of all, using crisis as a starting point of spreading your idea is totally legitimate. Through out the history, we have seen numerous times how crisis change how people perceive the world. If it is not because of the Great Depression in the 1930s, Keynesianism would never had the chance to spread. No one would believe that the solution for depression is additional government consumption. And if it is not for the 2008 crisis, no one would write books on Keynes revivalism. I think the reason why crisis is so effective to spread new ideas is simply because during crisis, people are shocked, their previous believe is shaken, they are vulnerable and would easily see any other new alternatives as the solution. This is what we call as hindsight bias.

Unlike her idea, that shock therapy is a bad idea, I believe that crisis is neutral. Any person can use a crisis for his own advantage, including spreading his ideas. Whether such idea is good or not is a separate matter and history will usually determine the longevity of an idea, whether it will survive for a long time or not. The same thing also happened in Indonesia during the 1966s. When Sukarno fell from his throne and Indonesia was consumed by more than 600% rate of inflation, it was also the right time to dethrone the socialism ideology and replace it with a balanced government intervention-free market economic system. In reality it was a success until Indonesia was turned into a state of crony capitalism and ended badly in the 1997 crisis. If we don't have such crisis, who knows where will our beloved country actually end. Maybe worse than now.

Second, her stories show how dictators use their power to force the free market idea into the society and how corrupt governmental officials cooperate with corporate officers for the sake of their own profits and interests (business lobbying is a serious problem, even in the United States). While that might be true, I don't think that represents the vision of Milton Friedman on capitalism and freedom. The capitalism that I know and believe as the best economic system for the welfare of society does not support dictatorism nor does it support crony capitalism. The capitalism that I know also does not support absolute freedom where business firms can do everything without any liabilities whatsoever. That does not make any sense. Economics teaches us that there are externalities that can be produced by a party against the welfare of the society and that in order to enable the market to work efficiently, such party must be held liable and internalize the costs that it has imposed to the society.

This is where I think Naomi Klein miscalculated her own idea. She work really hard to show how evil Milton Friedman is and how bad neoliberalism is, where government is being stripped from their power and the state assets are sold to several oligopolists who then control the market for their own benefits. Yet in reality, none of these represent neoliberalism thought. Minimum government should not be translated into: "you can do whatever you want". It means that the government should not try to be too big and then used by various interest group for their own purposes. We know that government consists of people, and we also know that they are not angels. To believe that government would always consist of good people would be as naive as believing that the market would always full with good people.

Ronald Coase in his famous Theory of the Firm has shown that firms, coordinated and integrated business units where capital, management, and employee meet and work together, exist within the market. Some empirical researches also show that 50% of the businesses conducted in the market are being run by firms. In short, this means that coordinated effort is necessary and also useful to the extent that the costs of doing so is cheaper than doing transactions via the market. So naturally, there is a balance between coordinated economy and uncoordinated economy where the invisible hand will work.

So in the end, what is neoliberalism? I am still looking for the answer during the course. But I don't believe that it should be placed in the same place with dictatorism and crony capitalism. The idea to promote the welfare of the society by maximizing the freedom of the people and limiting the role of the government in order to make it focus on its essential duties should never be used to justify greed and crimes. It is stupid if you think everything should not be regulated, but that's just the same with the idea of regulating everything. I'll update this issue once I finish the course.

Today's news indicates that the Department of Religion is considered as the worse governmental department in terms of corruption level. That's not so surprising, considering the fact that similar problem has occurred numerous times in the past. As an example, see this news from 2002. Our main question for today's post is: why religiosity is not translated into better legal compliance? Shouldn't religion help a person to be a better person and therefore religion can assist us in creating a community that has better legal compliance? I will argue that religiosity per se does not help in pursuing higher rate of legal compliance. In fact, the case is universal even for a person who denies the validity of any religion and instead claims that he is a moralist.

As I have argued in one of my previous posts, Knowing the Law vs Complying With The Law, people respond to incentives. You cannot expect that people will comply with the law simply because they know the law. To the extent that the benefit of doing a crime is higher than the costs, it is most likely that a criminal will conduct his crime. Thus, in law and economics view, we need legal enforcement to impose sanctions to criminals with a hope that such sanctions will increase the costs of doing criminal activities and can induce the criminals to reduce their negative activities.

Based on the above insight, no wonder that religion, standing alone, cannot be expected to significantly reduce the level of criminal activities simply because religion does not impose any sanction in the current life. You may be aware that certain religions offer a terrible afterlife sanctions for whoever dare to violate religion rules. While we can always debate on what constitutes religions rules, the issue is clear, although the sanctions are so vicious (burned alive and might be for an eternity too) that they cannot be comprehended by any ordinary human beings, they will only happen in the after life.

Some behavioral law and economic researches show that in general, people tend to discount the occurrence of bad things in the future even though they know that their current actions can increase the likelihood of those bad things. Good example: we know that overeating and less body exercise can be translated into higher probability of various nasty sickness, including heart attack, stroke, and diabetes. Yet, most people tend to discount that probability by staying with their unhealthy lifestyle (shamefully, I am also in the same category). It is also usual that significant changes in behavior will only occur after these people experience the problem by themselves. As an example, rate of doing healthy lifestyle activities will increase for people who have experienced heart attack and survive. That kind of experience will most likely leave a scar (or in economic terms, huge costs) in their life and they will have strong incentives to alter their behavior.

Returning to religiosity, not only that afterlife sanctions will be hugely discounted in considering them as a cost of doing criminal activities, there are several concepts in religion that can significantly reduce the value of such afterlife sanctions. Consider the concept of repentance of sins (taubat) that exist in any type of religion. This concept allows all believers to be forgiven by God from all of their sins to the extent they faithfully stop all of their previous heinous activities and do many good things as a repayment to the society. You can say from law and economics perspective that this is in line with the principle that criminals should compensate the society for the costs that these criminals impose to the society due to their criminal activities. That's true, but you must also consider the fact that the concept of repentance is not as effective as you think would be.

First, there is an issue on when should a person commit repentance? Since this can be done in any time before he dies and if we assume that people also discount the possibility of them dying at a time nearby, you can bet that most criminals will choose to repent far far away in the future. Even worse, since there is no minimum standard repayment for repentance, there is a possibility that such repayment activities are not suffice to cover the costs of their previous criminal activities. Obviously, that is not efficient for crime preventing. We are happy that religion provides an incentive for criminals to repay their sins in this world but without any clear enforcement mechanism, the repayment can be too late or not enough at all.

Second, since there is a possibility for multiple offenses and also multiple repentance, there are no strong incentives for religious people to comply with the law. They can always say that they are weak, that God is forgiven and all is well. Yes, we can argue that God might not agree with these people in relation to the faithfulness and intensity of their repentance, but no ones know what God really thinks. Uncertainties in this type of case increase the discount of afterlife sanctions, rendering their effectiveness into a new low level.

Having said that, the case is also similar for any moralists out there. We learn from one of US founding fathers, James Madison, that people are not angels. According to him, if people are angels, we do not need government, but since we know that they are not, we need a government to supervise them, and we also need further mechanism to check and balance the government since they consist of people too. You can claim that righteousness can come from many different ways, but you are just an ordinary human, and not all human can resist temptations.

Let me give you a simple example on insider trading cases. In the US, it is not unusual to find lawyers who still conduct insider trading cases even though they know the law and the severe punishment that will be imposed to them for doing such activities. Yet, some lawyers fall under insider trading cases. How could that be? Because the temptation is very high, we are talking about millions and millions of dollars here! And it is so easy to do insider trading that unless you can find a good way to remind yourself of the risks, you will most likely do it. And when they actually do it, you should ask why? Because again, they discount the probability of them getting caught because they know the law and they feel that they can avoid liability through their legal skills. Try to compare this with the fact that the Department of Religion handles an excessive amount of money from the government for hajj purposes. Do you think they are mentally strong enough to fight their temptations?

As you can see, even in the case of clear and severe punishments, some people cannot resist the temptations and end up doing their criminal activities. They might have already calculated the costs and benefits of their actions, where higher risks are translated into higher return. So, what can you expect from severe sanctions that will only occur in the future, the possibilities of them happening are pretty much uncertain, and there are many ways to avoid those sanctions with low costs(i.e. repentance)? The end result is clear, religion or morality, standing alone, is not effective to prevent people from doing criminal activities.

To close this post, I disagree that people are using this fact to blame religion as a source of evil. While religion and morality are not effective when they are standing alone, they can become a nice addition for strong legal enforcement. In his book, Predictably Irrational, Dan Ariely, a famous behavioral economist, shows that religion and morality can be useful tools in increasing the commitment of people to walk in the right path (especially by repeating such moment of commitments every day), i.e. as a method to increase their awareness that what they are doing is bad. But remember, they are only additional psychological tools, and effective strong legal enforcement would always be mandatory and necessary if we want to effectively reduce the rate of criminal activities.

Indonesia always provides us with interesting cases from economic perspective. The latest one is the new Blackberry product launching where the seller gave a 50% discount to 1,000 first purchasers. It was a major event as people rushed to Pacific Place mall to buy the product. Unfortunately there are some casualties, as there is an excessive amount of buyers and the mall is not big enough for all of them. While we can ask why didn't the seller stop the visitors as soon as they reach 1,000 to avoid unnecessary casualties, one may ask why did the seller choose this marketing strategy? Cafe Salemba economists provide their answers in these two nice articles: Economics of Queuing and More on Buying Frenzies. Meanwhile, I'll analyze the case from the Seller's perspective.

There are a lot of different types of buyers. Some are very conscious about the price of a product, so if the price is too high for them, they won't buy it. In the recent Blackberry case, we can argue that the seller used this understanding to actually screen its potential buyers and therefore they can get more buyers. The Blackberry's price is around 4,5 million rupiah. By all means, it is not a cheap gadget, but we know that such price is higher than the price in the United States and there is a theory that the price of the Blackberry in Indonesia is being inflated while the demand is still high in average. In short, it could be a very good business.

Now, by imposing a 50% discount to the price, there are two benefits that the seller can get. First, it can get those buyers who previously thought that Blackberry is overrated and therefore don't value Blackberry that high or people who want to have Blackberry but doesn't have enough money. Giving a 50% discount is still a good way to induce people to buy products. To the extent that this people don't highly value their time (they don't have better thing to do, or the utility of getting the Blackberry is higher from standing in the hellish queue, etc), these people will definitely enter the queue.

Second, the process can effectively screen the buyers who value their time more than their cash and get them to also buy the Blackberry with the inflated price. By giving such a hellish condition in the queue, the seller can know the people who will choose to skip the queue by paying more. No wonder that at the same time, the seller also conducted an exclusive sale using the original price. That's smart.

Now, we know that the seller imposed a restriction that the buyers in the queue cannot be represented by other people. Why do you think so? If there is no such restriction, the people who value time more than their cash will be induced to pay other people to stand in the queue for them, and that will disturb the screening mechanism. The seller definitely doesn't want to subsidize the people who value their time more. However, as we understand, the costs for supervision is also high. Therefore, they didn't conduct a full supervision, instead, they just let people rush in. Why?

There is an elementary game theory involved here. The seller knew that the costs for supervising the entire process would be high, managing thousands of people is not easy. But the buyers didn't know that information. Some will predict that the seller will be strict with the rules, some will predict that the seller will be lenient, and there will be chaos. Whatever the end result is, it is still a good way to screen the people who are not really sure with the value of their money versus their time but nevertheless have some interests to buy the Blackberry. If these people are risk averse, or prone to risks, they will probably not go to the queue and they will buy the product later on. For those who really want the Blackberry but don't have enough money, they will stay. For the people who value their time more and put their jockeys in the queue, they put a bet, if they get it, it would be nice, if not, they buy it later on and risk some money for the jockeys. Again, risk aversion matters, not all people want to risk their money for nothing and so they may decide not to do it.

Overall speaking, from the seller's perspective, there is a probability that the discounted products will be purchased by its unintended targets, i.e. the people who value their money less than their time. But it should not be many, and the seller can still effectively increase the demand of its products and reap more profits. So instead of being a sign of irrationality, it might be a good indication for good strategy for getting more buyers. Unless there are other additional high costs to the sellers for these kind of activities (i.e. death, riot, etc), we can expect more sellers to pursue the same strategy. So, two suggestions to improve the end result for consumers, next time it would be better to give a time limit for coming to the place and also limit the people who can stay in the location when they reach 1,000 or whatever the intended maximum amount of buyers is.

I can't stop laughing with this great piece of article from Greg Mankiw. Sigh, if only the Nobel Committee also gives Nobel Prize in laws, I should also be able to make this parody, hahaha. Anyway, it's a very good parody which questions why Obama is named as the winner of the Nobel Peace Prize. Enjoy, and don't forget to see the link in his post.

Here is a very concise article about the role of the Government. A must read for those who would like to understand policies differences between the "big" and "small" government. I can understand why most people will be in favor of the "big" government" during the term of crisis. We love saviors aren't we? For most of us, those smart looking officials seem to have all what it takes to save the country (and ahem, I'm not referring to the officials of my country).

Well, you better think again. I agree that the government must have a role in the development of a country, or else why we need to have a government in the first place? But we must also acknowledge the limitations of the government. They are, after all, made from the people and they definitely could not know and understand everything, including the entire risks and benefits of their policies. A good government should know when to stop making policies to avoid over regulation which could turn into a mess in the long term, or even in the short term.

By the way, hat off to Mr. David Brooks for his intelligent and easy to understand analogy.

Natural disasters are without a doubt a powerful force in this world. They destroy many lives and cause great losses not only to a particular area but also a nation as a whole. However, the fact that most people do not learn from the various occurrence of these disasters truly enrages me. Well, saying that people haven't learned anything might be exaggerating, they did learned something, but not in the right thing as we shall see further below. In Indonesia, whenever a disaster occurs, what would be the first thing to expect by us to see? Yes, statements that the disaster came because of God's wrath. The fact that some of the biggest disasters occurred in areas inhabited mostly by moslems also supports the claim that the disasters are actually a form of punishment from God because Indonesian moslems have not lived in accordance with God's laws or the Shari'a (maybe these people forget that moslems are indeed the majority of Indonesian citizens and therefore they are also the majority in the most parts of Indonesian territories). With respect to the recent West Sumatra's earthquake, some people even connect the occurrence time of such earthquake (and the subsequent earthquakes) with some verses in the Koran which coincidentally talk about God's punishment for the sin of men. To what extent can people make this kind of scary correlation? This is not funny anymore, this is dangerous. I have three simple arguments why there shouldn't be any relationship between the wrath of God and natural disasters:

If the disasters came because of men's sins, then using such logic, non moslem countries such as the United States of America and Israel must have been wiped off from the map a long, long time ago as most of them are unbelievers and their policies have hurted many moslems. But, apparently, they are not and in fact they are two of the most powerful countries in the Earth.
If the disasters came as a warning for Indonesian's moslem wrongdoings, then we are in a danger of having a very cruel and childish god (note that I'm not using the capital "G") who love to crush its beings for simple reasons. I simply don't buy this crazy idea.
No one could ever know what is in God's mind, so why even bother to make any relationship between God's wrath and natural disaster? Aren't we having a bad prejudice to our God?

Further, have you ever imagined that this fatalistic kind of thought is not efficient at all? By thinking that natural disaster is a part of God's punishment, people will believe that disasters cannot be avoided by any means whatsoever, it will then create pessimistic people who would surrender themselves to the oblivion without doing anything much. There would be no incentives to make better technologies to prevent disasters, minimize the damages, and save lives if people are thinking that they are facing with God's wrath and its inevitable destruction. For these pessimistic guys, all efforts would be useless. My God, is this the path that we will take? Will we let some irresponsible people use religion to scare the society? Religion should provide comfort to the people, to help them believe on the future, not to let them down and feel sorry about themselves. I guess this is the right time for us to really consider the fact that we live in a country which has a huge risk for earthquakes. Natural scientists have warned us and it is quite easy to find the data on this matter. Why don't we learn? I see history is repeating itself. We experience disasters, then we try to help the victims and discuss the ways to prevent these disasters to happen or at least minimize the damages, but after some times, we eventually forget them and you know what, before we can make a decent preparation, disasters have knocked ours door again. Absurd, simply absurd. If I'm the Government, apart from conducting any necessary real actions to help the victims, I would quickly release a statement saying that there is no relationship between natural disaster and God's wrath. I will not go to the mosque to pray and ask God why these disasters occur in my term and not others. What I will say are: the victims shall be taken care of, preventing actions shall be considered and conducted, and the reconstruction shall be done by paying attention to the potential risks of disasters in Indonesia. We need to ensure that the victims are still sane and that they can move on with their lives! My deepest sympathy to the victims and I hope that they can move on with their life. Disasters might crush our assets and some of our beloved ones. But as long we still alive, we will show that humans' determination will crush any limitation.

Here is a long and nice article on the current macroeconomics issue by Paul Krugman. I must admit that I share the same view for some of his thoughts, particularly with respect to the misuse of economic models to explain the world and the argument that the market is perfectly efficient and can always maintain that condition. For further discussion, you can see my post here on the issues of Capitalism. To cut it short, I never believe that someone can explain how the market works through some sophisticated mathematical equations and models. Of course you need to make some calculation in economics, but don't expect that everything will work perfectly in accordance with the calculation, there are too many factors which are affecting the economics performance. Now, let us move to today's main theme. What exactly is Ketchup Economics? According to Mr. Krugman, this is related to the assets valuation method use by finance economists in determining whether asset prices are reasonable, i.e. they don't ask whether asset prices made sense because of its real-world fundamentals like earnings, but whether asset prices made sense given other asset prices. Using Larry Summers' parable, the simplified version would be as follows: The "ketchup economists" have shown that two-quart bottles of ketchup invariably sell for exactly twice as much as one-quart bottles of ketchup, therefore they conclude from this fact that the ketchup market is perfectly efficient. Got the message? Using the Ketchup Economists logic of thinking, the fact that the prices of certain assets are going considerably up or down in certain periods should not be questioned as long as the prices of other similar assets are going up or down together. Without a doubt, this is dangerous. But how can we blame them for making this kind of assessment? If we take the assumption that the market is truly efficient, it is useless to make a price valuation based on the fundamental aspects of the assets, since it is the market force, the supply and demand mechanism, that will determine the exact value of those assets. Let me clarify first, while I do believe the concept of Invisible Hand, i.e. the best way to let the economy moves is by letting the force of supply and demand works automatically, I also believe that the market is not always efficient, there would always be a case where the amount of the supply or demand is too high or too low. There are many factors that can affect such amount of supply and demand, and I can assure you that not all of those reasons were made on a reasonable basis. Sometimes people are being in a state of high optimism and are willing to take more risks and then the economy moves forward, in other times people are being too pessimistic and then we're going through a recession. Then, what could be done? To be honest, I don't know yet. Many professional economists have tried to solve the problem, but no one has ever succeeded, so I don't think that I can provide the perfect solution. However, since most victims of the current crisis are major financial institutions, I would suggest that a better supervision mechanism should be implemented by the Government in the near future. We would also need certain regulations that will encourage financial institutions to have a better assessment on their business and investment risks and to ensure that they can always maintain a prudent approach with their risk management. I was quite surprised with the collapse of some major financial institutions back in 2008, it is just ridiculous that from all the possible companies to collapse, those who should actually be the most prudent companies are the ones who were proven not prudent and therefore collapsed firstly. In addition, since most of the major financial institutions are relying on rating companies in determining their risk of investment, it would also be helpful if the Government can start to have a meaningful discussion with major rating companies concerning their rating standards in order to create a better and more prudent rating mechanism. Further elaboration on this idea will surely be needed in the future.

All right, this is indeed a hilarious post from Greg Mankiw. The statistics show that children from higher income families are getting higher average SAT scores, and some people claim that there is a correlation between income and better result of tests. However, Mr. Mankiw theorizes that the correlation is not on the income rate, but on the fact that smart people are making more money and these people pass their genes to their children, thus smart children comes from smart parents not from rich parents. Okay, I'm not a professional statistician, but when dealing with statistics, I always remember what David Hume, a Scottish philosopher, has taught us on making a conclusion from our experience: just because in your experience an act is always followed by the second act does not mean that there is a causality between the first act and second act.

In Nassim Nicholas Taleb's wisdom (taken from his book "Fooled by Randomness"): "no amounts of observations of white swans can allow the inference that all swans are white, but the observation of a single black swan is sufficient to refute that conclusion." If translated: even after going through 1,000 successfull experiments, you will never be able to claim that a hypothesis is correct with 100% degree of certainty, but it will only need one failed experiment to reject such hypothesis. I agree with both of Hume and Taleb.

Previously, I have made some hypotheses with certain logical reasoning in my blog. Will it always be correct? Of course not! Situation and condition may change or maybe I haven't considered all of the relevant issues and facts, or maybe there is a fallacy within my seemingly fine argument. Mr. Mankiw is correct in saying that the ones who conclude that there is a relationship between family income and better test results might be wrong, but I also dare to say that his conclusion might not be correct either. Are there any relationship between smart people and their incomes, i.e. the smarter you are, the higher your income? I don't know, though I do know some rich stupid people and some poor to average smart people. Further, how many data should we collect before we can make such conclusion? Again, I don't know. My advice is simple, be very careful when we are dealing with statistics as people can always make different conclusions and interpretations from such statistics. When you think that a correlation between facts exists based on a result of a statistic, you better think it through again.

A short and very good story on the application of economic principles in day to day life from Greg Mankiw's blog. If you ask me Mr. Mankiw, my reply would be that the price in the private pier will go down based on the following reasoning:

the increase price of the town pier will reduce the competitors for getting slots in the town pier;
as long as such price is still cheaper than the price of slots at the private pier, those who are currently using the private pier will most probably move to the town's pier as right now there would be less competitors and therefore their chance to obtain a slot there is increased;
thus, to maintain its clients, the private pier should provide a competitive price by lowering its own price.

"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest" (Adam Smith - British Economist and Father of Capitalism) What is Capitalism?

In the simplest way, Capitalism can be described as the economic system which maintains the idea that owning and accumulating private wealth are the basic rights of every person, and those rights must be preserved and protected by the State on a first priority basis. In general, Capitalism believes that the preservation of the above rights and the freedom of people to enjoy such rights will enable the society, as a whole, to gain maximum prosperity. However, we must always remember that Capitalism is not a divine system established by God. It is an economic system created and developed by men through countless trials and errors.

There are many ways in implementing Capitalism in various parts of the world and even until today, we have not found yet a definitive and final form of Capitalism. To make it short, Capitalism is still evolving and I believe that the process itself is unlimited. In this article, I will explain some of the basic concepts of Capitalism. I'm not an economist, but my job as a corporate lawyer is directly related to the practice of Capitalism. Through my job, I realize that Capitalism makes sense and its principles are built on a solid basis. As I will further argue in this article, and despite the critics and the current global financial crisis, I still consider Capitalism as the best economic system that men ever have.

What Are the Basic Principles of Capitalism?

Capitalism is derived from three basic principles: 1. a common man will put his self interest as his first priority; 2. all men are interdependent; and 3. free competition is the most effective safeguard mechanism of Capitalism.

Could You Explain the First Principle of Capitalism?

Capitalism believes that a common man will put his personal interest as his first priority. It is not surprising that, using the above argument, many people claim that capitalists are evil individualists who only think about themselves and who will do anything to obtain what they want. But, those people are exaggerating, too exaggerating. I even dare to say that they are actually fooling themselves for not letting to believe their exact nature as men. Let us go through this simple test.

Say that you are an average man, having some decent work with a considerable good salary for living and you are not in a dire need. Then, you somehow get the opportunity to receive US$10 legally from someone. Now, answer these questions truthfully. Would you really want to reject that money and say to the generous man that the money should be given to other people in dire need? Then, try increase the number into US$100, US$1,000, US$10,000, and so on. And then keep asking the same question, would you reject that money?

How about if you are also in a dire need, will your answer remain the same? Or, try to imagine this: Having work really hard in your office, you soon realize that up to 30% (depends on the amount of your gross salary) of your salary is going to our beloved country for paying your income tax, which means in one year, there is a probability that you might spend more than 3 months doing charity work, working without any payment, acceptable or not? For the first question, I'll be honest, I'll take the money for sure (especially when the amount is significant). For the second question, I must be damned if I call that kind of legalized robbery as acceptable (though the new Indonesian Income Tax Law provides a lower tax rate and a higher limit of taxable income, for which I say Hooray!!!). I bet my X-BOX 360 that most people will also take the money and reject the high rate of tax (or even the tax itself).

This is natural, it's in our blood. You're not turning into a bloody parasitic dark lord for pursuing your self interest, you're basically trying to survive in this vast world. Capitalism happily embraces this fact and establishes it into its first principle. Interestingly however, some people pretend to forget their own nature on these issues and say crap things publicly about the need to promote social interests above individual interests while in reality these guys would absolutely chase their own interests before even thinking about the interests of the society. By this, I refer to the majority of the politicians.

How Come the Pursuit of Self-Interest Are Not Causing Misery?

You see, after acknowledging the basic nature of men, Capitalism puts the second basic principle: not a single man can pursue his self-interest without cooperating with others. Thus, every man is interdependent with another man. Whether they like it or not, they need to work together and reach mutual understanding in order to satisfy their needs. What a beautiful concept!

Have you ever imagined how you can get your nice nasi padang at the Sederhana Restaurant? Who supply the rice, the meat, the coconut milk and those other spices? Who cook the tasty food? Who serve the food? Who provide the place of the restaurant? The creation of Nasi Padang Sederhana actually involves a huge amount of actions, actors and factors, from the production of the rice to the distribution of the Sederhana franchise (including the recipes).

The most interesting part of the above scheme is the fact that none of the actors involved in such scheme are doing their part of actions due to their compassion for the greater good of the society. All of them are pursuing their own needs and interests! The farmers grow and sell the rice so that they can earn some cash to buy their needs, the waiters at the restaurant serve the guests nicely so that they can earn their salary (and maybe some tip) and buy their needs, and so on. And amazingly, no one actually have a global and full control over such process despite its complexity. If you think that there is a conspiracy back there which force all of the above actors to work together in order to provide a Nasi Padang, you must be crazy. So, in the end it is all interrelated.

Capitalism believes that the pursuit of self interest should not cause misery to each other, because through the existence and exchange of various self interests, men can actually satisfy their needs. The words of Adam Smith stated in the opening of this Article would be excellent to summarize this second principle. I must also add a note that this second principle is being greatly supported by the existence of money. With money, people has an easier mechanism to value goods or services that they want to produce or obtain. I will reserve the discussion about money on a separate article.

I Don't Buy This Idea, There is Something Missing, Isn't It?

True, as beautifully crafted as it may be, there is still a weak point in the second principle: not all men have equal power and status. Though all men are interdependent, the difference of power may disrupt the balance and thus opening a way for the emergence of the darkest part of human soul, the hunger for everything, even if it costs other people's life and needs. Without any safeguard mechanism, Capitalism will definitely crumble into dusts as a result of this problem (as once predicted by Karl Marx). Thus came the third principle of Capitalism: Free Competition. Too simplistic? Not at all.

Free competition is actually a brilliant way of ensuring that power is distributed efficiently among men. The concept is actually simple and can be explained by the following example: Some years ago, there were only two telecommunication providers in Indonesia using a dual-monopolistic system. To cut it short, these two companies have absolute control over the Indonesian telecommunication services. Result? Expensive telecommunication tariff and poor infrastructure. In 2004, it only cost me Rp80,000 per hour to make an international call from Seoul to Jakarta using a Seoul public telephone. That was very cheap at that time compared to the cost for doing international calls from Jakarta to Seoul.

But now, with the increasing number of telecommunication providers, we see the new era of cheap telecommunication services. Those telecommunication providers spend billions of Rupiah just for claiming in TVs and radios that they are the cheapest operator. Indeed, they don't have many choices. If they don't cut their prices, provide better services, and make the most entertaining advertisement, other operators will claim their customers and in the long run, losses will become the end result. Of course, how can they cut their prices if they can't increase their business efficiency? Like it or not, this competition game forces those operators to find new ways in increasing their business outputs. Efficiency, creativity, innovation, name it, and they will get it. Such are the results of competition, incredible!

In fact, the free market, the free competition, is actually doing better than the Anti Monopoly Supervisory Committee (KPPU) in the telecommunication sector. This is related to one case when KPPU brought the case of Temasek, a Singaporean State Owned Company, to Indonesian public attention for having control in two major Indonesian telecommunication companies. In that case, KPPU claimed that such control has caused monopoly and unfair competition and thus increasing the consumer cost for getting telecommunication services. So much hours and money are wasted to force Temasek to release its majority ownership in one of the operators and to cause those two operators to reduce their tariff. Yet, without having to wait for the final judgement, those two telecommunication operators have already reduced their tariffs for the sake of winning the competition. And this is the current trend, as I've once discussed it with an executive of a major telecommunication provider. Do we actually need a better example for understanding the power of free competition? I guess not.

Okay, Enough with Capitalism Principles, What About the Market?

Ah, good timing! As discussed in the second principle of Capitalism, all men are interdependent. But, how can they cooperate with each other? The answer is the market. The market is the most important facility of any economic system, even for the so called communism, since it provides a place for people to meet, trade and exchange their self-interests. Of course, I'm not referring to a traditional market in a remote village where you can find living stocks and fresh vegetables. I'm referring to the concept of market as an abstract place, a structure where goods and services are offered and traded, where supply meets demand, where buyers meet sellers.

There are countless numbers of markets in this world, telecommunication market, energy market, stock market, financial market, commodities market, you name it. But the basic is same, within the respective market, people may look out for what they want and try to obtain those things with certain price. The issue of price brings us to one of the most important aspects of the market under the system of Capitalism, one that has become a never ending subject of debate, the market equilibrium and the self-efficiency of the market.

Until today, no one has ever reached a perfect theory which can explain how the market can reach those conditions, where the prices of each goods and services reflect the actual supply and demand, and all market participants have obtained the necessary information in making their economic decision. It is almost impossible for me to explain those complicated issues within a single article without having the readers getting lost in understanding the concept. So, let me put this simply.

Under the basic principles of capitalism, the market will work best if there is a minimum intervention from forces outside the market, BUT, it does not mean that the market itself can always maintain its equilibrium and efficiency, some interventions would be need for certain cases, especially when the principle of fair competition has been breached due to unfair or illegal activities. The key issue here, is to find the best policy that can HELP the market to avoid its own weaknesses without having to sacrifice the freedom and the unlimited opportunities that market can produce through free enterprises.

I can't answer that yet, but am hoping through the times of my journey here, I would be able to provide certain solutions and insights on how we can create such best policy.

Why Promoting Capitalism?

Simply because Capitalism is applicable in every part of the world, even in the so called Communist Republic of China, and because it has survived for many times during the last 200 years. Economic crises come and go for many times, people have gone through some pessimistic and optimistic periods in doing their business. You know, during crisis, like in 1933, 1987, 1997, and 2008, people always claim about the end of capitalism. Of course this is a politically correct maneuver and it is easy to reach such conclusion. But, if you analyze it further, in the end it is a part of a grand business cycle. What goes up, will go down, and vice versa.

During the Asia financial crisis in 1997, most people blame us for our fragile economic fundamentals, and you know how the western countries see Asia at that time, a failure. But now, it is Asia who has the better economic fundamentals and can maintain such fundamentals despite the crisis in the US. Amazingly, most of Asia Countries and US use capitalism principles in making their economic policy. I believe that the basic nature of human is always the same, everyone want the same opportunity to do business and reap profits, and they want to do it without too much of restrictions and inefficiency, the way that capitalism has always preached about.

In general, the application of Capitalism principles has created an accumulation of wealth and development in many countries, and Indonesia, without a doubt, has also received benefits from capitalism. Of course, like I've said in the beginning of this article, Capitalism is not without any flaws, there will always be a problem, such as the problem of distribution of wealth, power disparity between market players, etc. But, we can't stop using a system or even try to replace it in entirety because of some flaws, that would be horrendous. It is our job to modify and fix the flaws in capitalism to ensure that it can work properly rather than spending times on building a new entire system which would be most likely not efficient. This is a never-ending process, and I expect to see many new developments in the future of capitalism.

To end this article, I would like to share a piece of wisdom from Milton Friedman, an American Nobel Laureate, "What kind of society isn't structured on greed? the problem of social organization is how to create an arrangement under which greed will do the least harm; capitalism is that kind of a system."