Is Economics Hard?

Recently, there has been a discussion in the blogsphere, sparked by a short essay of Kartik Athreya: Economics is Hard, Don't Let Bloggers Tell You Otherwise.

Well, economics is hard, at least for me, and I believe for the baristas here too, who have spent days and nights trying to understand one chapter of, say, a standard micro or macro grad textbook.

Then, why the baristas here seemingly make economics fun?

Because it is indeed fun, and we want to share the fun to you all, including the non-economics students, by skipping most of those technicalities and jargons. We at the Cafe want to convey a simple message that you can use economics to see things differently. The most politically motivated purpose is probably just to warn you against ill-informed press corps.

I have no illusion that hanging out in the Cafe would substitute for a proper formal economic education -- but it is equally annoying to see some people believe he/she has mastered economics simply by reading one or two popular books by Stiglitz or Krugman. This is why sometimes we launch a sharp-tongued attack against his/her arguments (note: the argument, not personal)

Is econ hard? Yes. So are anthropology, political science, English literature, biology, and any serious attempt to understand things rationally and systematically.

For Auction: Freshman Seats

Greg Mankiw told us that Harvard admission committee has decided to auction off 100 freshman seats for the next academic year to overcome their budget shortage.

Of course, you may want to be little bit careful in reading the date of such announcement.

On the second thought, the idea is not as outlandish at it may seem. What about the FEUI follows the suit and would launch an open auction for, say, 30 seats next year -- and use the money to buy books for library and send their junior lecturer to study abroad?

I think it is a good idea as long as they make it open and transparent. On a smaller scale, they can try to auction off seats in Aco's class -- I wonder how much the true market value of his lectures is :-D

What do you think?

Et Tu, Jekus?

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

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

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

But is he up to expectation?

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

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

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

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

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

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

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

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

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

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

Back to Basics

Greg Mankiw, himself the author of an excellent introductory economics textbook, offers several subtle changes in teaching Econ 101 amidst the recent crisis by giving more emphasize on the role of financial institutions, the effects of leverage, the limits of monetary policy, and the challenge of forecasting.

Sorry, rightly so, no neoliberalism on the menu.

Mankiw also noted that:

Despite the enormity of recent events, the principles of economics are largely unchanged. Students still need to learn about the gains from trade, supply and demand, the efficiency properties of market outcomes, and so on. These topics will remain the bread-and-butter of introductory courses.

Which brings me to wonder after reading some protectionist pundits' and faux economists' remarks on recent neolib hullabaloos: what did they learn from their introductory course --if they ever had taken it?

Error by Omission or Maybe Something Else

Against free market, Kwik Kian Gie wrote:

Because anything goes without government regulation, she (the producer) starts to conduct competitive strategy that kills her competitors through dirty practice, supported by her wealth. For example, she sells her products at price below cost of production. She would suffer loss, but she can bear it, thanks to her already accumulated wealth. At such price, all competitors would lose and go bankrupt. Except she, who has the largest capital. After the competitors go bankrupt, with her monopoly power, she increases her product's price very steeply.

Let me restate my take on predatory pricing: as long as there is no government regulation discriminating other producers, I don't see it as a problem --or dirty practice. And letting the market work will set the price back at producer's normal profit level. But you can not see that in Kwik's story because it was not yet finished and the next part of the story was omitted either by error or incomprehension.

Why?

The supernormal profit from after-predatory pricing monopoly power will attract the old producers and new producers to enter the market, as long as there is no government restriction. This will keep the price down again.

Also, any monopolist is subject to the consumer's demand -if you look at demand function in a monopolistic market, it's downward sloping. Thus, first, charging higher price means lower quantity demanded. Second, consumers do not solely look at a single product, she will always take into account the substitutes. For instance, if the price of espresso goes crazy, even a coffee freak like me will switch to teh botol. As a result, the predator needs to consider a whole arrays of competitors.

Where do I get this idea from? Econ 101 textbook. And by the way, the textbook always states that what matters for economic agent's decision is the marginal cost and marginal revenue (or benefit), not accumulated wealth.

Your baristas talked about this misleading op-ed during the break, and perhaps Ap will join me to serve you his comment.

Meta-what?

Can anyone give me idea what exactly a meta-commodity means, so that I can understand the following sentence?

We should remember that food constitutes a meta-commodity that cannot be treated merely according to economic calculations.

Does it mean a sacred stuff, like amulet or keris --the Javanese dagger? But even we can calculate the economic value, the market price, of keris, no?

Dark Stuff That Makes You Statistically Smart

Ziliak and McCloskey, by way of Tim Harford, reveal that Student's t-test, a very important statistical test, refers to William Sealy Gosset. This man wanted to know how many experiment with hops, malt, and barley, needs to be done to produce a considerable confidence of the result in pursuit of good beer.

That beer is known as Guinness, the exquisite dark stuff that probably is the greatest Irish contribution to the world. Better than James Joyce or the U2.

Lift your pint and make a toast for Gosset, but I am not sure for which one: the Guinness or his t-test. Maybe both.