The Economics of Poltical conflicts

Very recently, the media was bombarded by the clash within the Nation awakening party, the political party is divided into two different sides. I would like to see how the economics rational explaining it. It should be clear that I am not a supporter of both parties, it is interesting for me however, all that had happened are turn out to be logically rational.
A conflict by every means is costly, therefore they (both parties) are operating in a high cost, and below its optimum full production level. In economic term, we call it below the production possibilities frontier. This is represented by the graph on the left. any where inside the cone are feasible to enough to attained. In our case the two axis represent the two parties (M for vertical and GD for horizontal), the cone (PPF) is the number of potential voters, as internal split will cost them some voters, hence both are operating inside the cone, instead of operating in the blue line of PPF where the number of voters is much greater.

ISLAH on the way?
if that's the case, then why is so hard for them to do islah? it's not very surprising, because the islah is in fact not a sustainable point. This means that there are problem in dynamic inconsistencies in doing islah, preferences of both parties will change overtime. You see, say M is willing to accept islah, they might move from every point inside the cone to one point at the blue line, M groups are signaling, they are ready for peace treaty, calling disarmaments in their side. the problem with this, is that in the other side GD will now have a stronger incentive to wipe out all the M group, and therefore they will opt for a corner solution, choosing the 100 percent voters on the rightest point of the blue line. This happens for vice versa, with the benefit of the second mover. This explains why both parties decided to wait. As long as both parties don't have credible expected peace commitment there will no be islah. Both parties seem to send signals of continues fighting.

why are they fighting anyway?
I am not a politician, I honestly don't know. However,in economics literature conflicts might happen depends on the feasibility of such conflicts, internal splits or whatever we call it.
feasibility depends in two term, benefit and cost, according to Collier (2005,2006) , conflicts will happen wherever it is feasible to do.The benefit is high, since the general election is coming, more pie will be available in the near future, and if they are lucky, less mouth to feed. The cost is not enormous, some says in PKB, GD is irreplaceable, so preference toward GD is almost inelastic to external shocks. the last but not least is the probability to lose and to win, if we say the non-activating of M is a coup d'etat process then it's a rational thing to do, because historically, the other group tend to win anyway.

what about in the future?
the problem of conflicts is, it works in economies of scale framework, it gets better when it escalates even more. the losers will ask for friends and allies for help, and so do the winners, both parties accumulating their power in the expense of others which tend to be persistent Collier(2002) call this a conflict trap. I don't really understand politically, but fragmenting a political party in many small pieces is not very healthy for them, just look at PPP, or others. one thing for sure, if GD wins once more time, the more likely this things happen in the future, in an increasing scale of splits. this might happen in the future either because the probability of winning is getting higher, or whereas the cost turned to be insignificant. However no matter how significant that might be, it seems that the counter reaction is getting tougher everyday.

well, just see what will happen shall we?, time will tell.

by Rajawali muda

Globalization, neo tribalism & intolerance

Should the first lead to the second and third? There have been too many instances where it is what happened, especially when economic downturn opens up political niche.

Here is my take on The Jakarta Post (click here) on the release of propaganda short movie by Geert Wilder from the Netherlands.

Marriage and the City

Carrie Bradshaw once said that “Some people are settling down, some people are settling, and some people refuse to settle for anything less than butterflies."

Somehow the quote comes to my mind when I was reading an article in the Economist on Japan economy which said:

"Under the traditional (Japan) system, companies hired graduates and then invested heavily in their training and development. To keep workers loyal and protect their investment, they offered lifetime employment on steadily increasing pay, with generous fringe benefits and a lump sum on retirement."

Replace hired with marriage, companies/graduates with women/men and it could transform you to an episode to Sex in the City (by the way, the movie will be release soon)

In earlier (and better?) time, the women can focus on gaining skill on household chores and raising kid since they know the marriage is likely to last until death. The men would focuses on income generating skill. Division of labor works those days. But now marriage is not necessarily for life and people know it. What would be the rational response?

The Logic of Life (LIF) by Tim Hartford in the page 91-92 said that,

"The more people divorced, the more divorcees – that is, potential marriage partners – you could meet. …Because divorce was conceivable, women preserved career options. But because women had career options divorce became conceivable."

An interesting part of independence is that you depend less on other, and other less on you. Education and career bring all the above to both women and men. But it brings the credible threat (in game theory lexicon) that one can bail out of marriage in less hesitation than in earlier time. Maybe men refusing to marry up has rational reason (beside pride) after all since the outside option would greater as well for the woman.

LIF concludes on page 95 that,

'In the long run, the rational response is not for the couple to marry early and marry often; it is to divorce less and marry less… romantic couples are moving from boom and bust of marriage and divorce to a more stable arrangement where marriages are delayed… We know there exist something called an optimal divorce rate, and we’re 100 percent sure it isn’t zero”

I think Carrie Bradshaw would agree with that.

To Attend or Not to Attend Class

A student of mine post a fascinating post on his excellent joint blog which scattered with deep insights and youthful spirit, hence the name (for Youthful Insight click here).

He questioned the need for mandatory attendance in FEUI (click here for the post), the faculty even goes so far as to organize an online attendance list. (Disclosure: as student activist during undergrad, I took (much) more than my fair share of skipping class).

Let’s review the matter here. The goals are to impart knowledge and develop critical mind set among/the student. Lecture is one of the ways to reach those goals. As many studies in learning/cognitive psychology showed, sitting down listening passively to lecture has one of the lowest retention level.

I’d propose a drastic measure. Let’s do away with all lectures and classes.

Let’s distribute all the weekly topic, reading lists and lecture notes in the beginning of semester but replace lectures/classes with a weekly test (yes, every week).

If the students are able to muster self discipline and sufficiently understand the material, as the score would have shown, then the goal is reached without the need for any lecturer-student meeting. It should take less than one hour and lecturer assistances could handle the test taking/grading.

What if some students need feedback & further clarification? The lecturer could arrange for office hour (say, two hours every two weeks) where those students could come voluntarily, not for a lecture but with specific questions on material they don’t quite understand.

This is not as radical as it seems. Samuel Bowles, one of my professors in Siena that get his PhD from and used to be associate professor in Harvard, has done it halfway. We were given set of (quite difficult) questions that each one of us must be ready to answer in each of his class.

He specifically asked us not to attend if we have not prepared (and threaten to throw us out if we could not answered properly) since we will not get the most of the time spent in class and not contributing to knowledge/welfare of others. After the first hour of questioning he will go on with the lecture in the second hour, always a fascinating one.

But why not go for the full treat?

Know Thy Purchase

The Oracle at Delphi that the Greek revered once famously exhorted seekers of wisdom: "Know thyself.

It has many profound implications since knowing oneself fully will enable us to understand other human more, people have much more in common than in contrast. Thus enable us to getting a closer glimpse on our place in the universe and, if you subscribe to the notion, thy maker.

Compare to that, the title of this post is disappointingly simple. If you know what you buy, then… . you know the value of what you buy and whether you are paying too much or too little. Is that it?

But that’s it!

But surprisingly smart people at hot shot company seem not to get it. Bear Stern, one of the largest financial companies on Wall Street, has followed (read article here) Citigroup and Merrill Lynch into financial debacle due to subprime mortgage over exposure.

Why? The so-called innovation in financial instrument has sliced and diced numerous kinds of asset back securities including house/apartment mortgage with non-negligible risk of default, thus the name sub prime (more detailed explanation here), with other more credit worthy assets.

But it becoming so complex with low disclosure requirement that the buyer don’t really know what’s behind their peace of paper that they bought.

Add the concept of self serving bias and herd behavior in behavioral economics. If other smart and rich people are buying the exotic (read: I don’t really understand it but other smart and rich people are doing it) financial instrument. Which one is more psychologically comforting? To check carefully whether smart adn rich peoples made a mistake and risk ridicules or proclaimed that “we get it” and get acceptance to the fancy club?

Sadly, the second options were in the majority.

And now the trusts are shaken and the lies exposed. It takes more than word of US Finance Minister (read his statement yesterday here) to calm the market. As any couple would know, it takes a lot to solved long ignored problem (click here). It takes sincere apology, full disclosure and strict rule not repeat it again. It means tight regulation and information availability. More promises unkept could only lead to more disaster ahead.

So much trouble for such a simple thing not done. Know thy purchase.

P.S.

If you are in blue over the subprime. Watch subprime mortgage blues at Greg Mankie’s blog here

Barack Obama and Behavioural Economics

This blog is not in the business of endorsing US presidential candidates. Nor we harbor illusion that our position can move votes there.

Nevertheless, as economist wanna-be I could not help but excited over an article (click here) that point how Richard Thaler, one of the early economist that point out behaviour anomalies could not be explain by standard model, is in close contact with the candidates. Behavioral Economics is currently getting stronger hearing in the mainstream after recognition from Nobel Prize committe in 2002 & 2005.

One of Obama policy attributed to his influence cited in the article is:

“For example, one key behavioral finding is that people often fail to set aside money for retirement even when their employers offer generous 401(k) plans. If, on the other hand, you automatically enroll workers in 401(k)s but allow them to opt out, most stick with it. Obama's savings plan exploits this so-called status quo bias.”

Good to know that Obama that despite his soaring rhetoric (watch here and here), base his policy on solid and strong economic ideas. They say that economics has turned cynical and can do nothing but become empty shell of materialism. They say that economics can not bring insight about real human behavior into useful policy recommendation. To those charges, let us answer in three words. Yes, we can!

Addendum (01/03/08) from an article in The Economist:

"His chief economic adviser, a respected young academic called Austan Goolsbee of the University of Chicago, is sensible and pragmatic. His plan to save millions of people from struggling to fill out their tax returns is a gem. Anyone who earns only a salary and bank interest, both of which are automatically reported to the taxman, will be sent a tax return that has already been filled in, which they can accept or reject. At a stroke, countless headaches would be averted."

New pop-econ: Parentonomics

The popularity of Freakonomics and other pop-econ books (i.e. Undercover Economist, More Sex is Safer Sex, The Economic Naturalist, Common Sense Economics, Naked Economics, and so on) has lead to even more broader application of economic tools in our daily life. I've just recently read that there will be a new book published under this pop-econ genre. The book is Parentonomics. 

Parentonomics is a book that use game-theory tools to understand and solve problems of taking care of children or being a 'good' parents.   That's what I've surf so far in the blog of the author Joshua Gans - Game Theorist. The book is going to be publish soon. Are you ready to order it?

Some one whispering me, "I believe you need to do census first, to identify how many kaFE's member being married and having kids so the book will be applicable for them". Oh, I guess we can still read this book just to apply it with our nephew though. Doesn't need to have kids first to understand about parenting - especially using economic. Right?

Modelling Art

An Attempt to Crack The Real-World Mechanism [1]

by: Dhaniel Ilyas

Enough about my humble attempts on econometric philosophy and ethics issues that I had written in my previous two writings, I will now try in lettering some words on some semi-technical econometrics topics with simple explanations. My previous writings were in Indonesian language. Since I know we have a noteworthy amount of interested blog-reader, I will now give a shot in making articles in English.

Most econometric models contain unknown parameters. An estimate of these parameters (in a model) is crucial in knowing the behavior of the variables relating to it. To compute the parameter estimates we need two things: A model describing interaction among variables with certain set of parameters and a sample made up of real observed data. Thus, if the model is correctly specified, it will describe the real-world mechanism which generated the data in our sample.

This process does not come without problems. First, nobody knows, even the smartest econometricians alive, the ‘true’ real world mechanism which generated the sample data.[2] Second, often the reliability of the data mining process from surveys is questionable. I have never tried to find any research concerning Indonesia’s Central Bureau of Statistics (BPS) data quality (may be someone can point me out to certain studies). Actually, there have been some techniques in econometrics for minimizing the bias that comes from ‘real’ data error measurement. But if the bias is severe, there is nothing much we can do.

Population is the base from which a sample is drawn. A model is made for explaining what is going on in the population, using the sample data, in order to make inferences and forecasting. Once upon a time, when statistics was biostatistics, their object of studies was the human population from a specific town, villages or country from which random samples were drawn. The average weight of all members in the population would then be estimated by the sample mean of individual’s weight. The sample mean was an estimate of the population mean. The idea was to represent the population by using the sample that could also save time and money. In contrast, the use of the term population in econometrics is simply a metaphor.

A better way to explain the last statement is by introducing the concept of data-generating process (DGP). By this term, any real-world mechanism that is at work in actual economic activity process, it is precisely the mechanism that our econometric model is supposed to describe. Thus, a DGP is the analog of the population in biostatistics as sample could be drawn from a DGP just as they may be drawn from a population. This seems too technical to be digested. Let just say that if I were the know-all-superman, and I have a magic-super-complex mathematical equation that can explain perfectly about all things that happened in the world describe in the form of parameters, variables and some well-defined stochastic element, I can explain the past, present, and future with remarkable accuracy. It is exactly what we after in building a model: cracking the real ‘true’ world mechanism (with our naïve and limited[3] mathematical and computation ability) as close as we can be.

A model is build to understand the existing phenomena. A class of models may have a general (mathematical) form within which the members of the class are distinguished by values of the parameters. In a model that are not mathematically tractable, computationally intensive methods involving simulations, resamplings, etc may be used to make the desired inferences. The process of model building required continous refinements. The evolution of the models proceeds from vague, tentative models to more complex ones, along with our understanding of the process being modeled. It is not possible to measure bias or variance of a model selection (from any arbritary set of models), except in the relatively simple case of selection from some well-defined and simple set of possible models.

Now, let me explain a bit into the practice of modelling. With our limitation to process all the data in the world, we need to create a reasonable strategy in our modelling process. First, we need to form a solid theory about the phenomena we want to observe. This is critically needed because basically we can throw any variables into our (simplified) model. Do you think a falling leaves in autumn will have an effect to certain stock price? Although some ambitious modeller could believe that this seemingly uncorrelated varibles can actually relate, I doubt that an economist will pursue such modelling strategy. And even if I have a good model that explain elegantly the change in one or some variables in terms of other variables, it does not imply true causation. Let me quote what Gujarati said in his book,”…a statistical relationship per se cannot logically imply causation…”[4]. From this apriori or theoritical considerations we go forward into the ‘jungle of empirical study’. Many of us experience surprising result that mounted into a variety of problems, but as life itself, we have to put up with it and struggle all the way. Thus we have come into what people say of a knowledge that is described more as an ‘art’.

Everyday, we look into the debate of outstanding economists, econometricians, physicists[5] statisticians, and mathematicians with their own economic model that they believe were superior, but at the end of the day the winner is hardly found in the mist of our limitation in comprehending the world perfectly. But we have to acknowledge also the positive result and insight from each of their models that shapes our economic advancement until today. Never forget that the ‘real’ judge is not a bunch of towering scientist that has a privilege to say a model is good or bad. It is the effect of the positive spirit in the model, acknowledge by the real advancement of human beings in all the related aspects, which will make a model superior. Thus as a modeller myself, I will say,”one effective and efficient model for one problem at hand.”

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[1] For interested (highly) advanced reader, I recommend Russel Davidson and James G. MacKinnon book,”Econometric Theory and Methods”. I quote heavily from the book in the fourth and fifth paragraph.

[2] My Econometric Professor during a class session made this kind of statement. It was one of my most enjoying lecture.

[3] If our mathematical and computation ability were fully perfect, there will be no forecasting error. This statement create a philosophical trait: Is it all things in this world were just merely mathematics?

[4] See Damodar N. Gujarati book,”Basic Econometrics”.

[5] An of research come to be known as physical economics has been going on for some time until today.

Why Plastic (Bag) Should Be Expensive?

After I take the photo above, I realize why in many western country plastic bag should be expensive.

If plastic bags is free (like in all supermarket at Jakarta), then there is no need for people to think further about environment. Of course, it should be not as simple as that. But, if people cares with sewage flow, they should be care with garbage and waste that they thrown away into the river or brooklet or sewer. But, people obviously ignorant. If you take a closer look at the river or brooklet or sewer, you will easily find that all them are fully covered with waste and garbage especially plastic. When you are willing to spent a bit of time to count how many plastic bag and plastic wrap (e.g. for package food products) - among any other kind of waste, then you will realize that plastic waste are more than half of total waste. The implications for this neglected situation are water flow jammed, some sort of vegetation will grown in the banks, some sort of animal (snakes, lizards, rats, etc.) also build their nest there, in the long run you will see the water level rise, water born disease exposed the population and ‘Aha!’ flood is everywhere.

Ok, enough with the fortune teller stuff. (What?! It’s not prediction, it’s already occur now!). That is where the economics incentive/disincentive works. If you agree with me that the root of problem here is plastic waste, then the simple solution is reduce the plastic waste. To reduce the plastic waste then we have to reduce plastic usage. To reduce plastic usage, it must be “expensive” enough so people will reduce their use of plastic. Low usage of plastic will lead to lower plastic waste. Lower plastic waste will make our job a lot more easier to clean up river or brooklet or sewer everywhere, especially in our neighborhood. The long run impact of such achievement will be better environment that create cleaner, healthier, and economically efficient society. I will leave you all with such a “good-to-be-true” dream.

One moment, I am hearing someone ask me a question: "how we should bring our shopping goodies?" Well, I may answer: Why don’t we start bring our own bag, and you can decide the size depending on your own need. Or, why don’t you ask for paper box? See, there are lots of option actually...

See No bag, thanks! campaign for more photos prove on plastic ‘disease’ on earth

Message on Economic Welfare...

From the conclusion of Debnath Guharoy's article in The Jakarta Post titled This is a good time for business to remember Robin Hood,

If cub bike demand is flat, can motorcycle manufacturers look at assembling big bikes for the top end of the local market? Can cosmetics companies examine the demand for an upmarket chain of salons? Can fast-food chains open more outlets in more metro areas? Can the telcos license more resellers to push broadband for them? Can everybody who can afford it please subscribe to cable TV, newspapers and magazines? I could go on and on but the message is simple: Sell more high-end goods to the fortunate minority because they can afford it, and create new jobs for the poor because they need it.

I am wondering the Guharoy's main message as bolded above. How economic policy could support such "normative" idea? It sounds like ask the economy to give charity...