For your own safety, don't use wrong examples

This is a small tip for fellow econ instructors, especially in microeconomics.

We teach students that in general, firms maximize profits. Then we talk about the anatomy of profit. That is, it consists of revenue and costs. So, profit is simply revenue minus cost. Then we go on with some examples.

My suggestion, avoid using state-owned enterprises as example. Never use Pertamina, PLN, Telkom and all that. Because, when they report profit (or loss, usually), we have no idea how they calculate it. The profit (or loss, usually) figure is there. But notice. When it comes to introducing or installing a new policy that affects these enterprises, the government always has to ask the cost figure (in particular primary production costs). And they ... start to calculate! It happened to Pertamina, now we are WAITING for PLN's cost calculation! So what profit (or loss, usually) they always report? Well, either they don't know how to calculate profits, or they lie.

Avoid using bad examples.

RIP: Aslam Effendi

Allow me for a word of mourning. I received an email from Pakistan's economist, Khalil Ahmad. It was a sad news. Aslam Effendi, a great economist from Pakistan passed away after a "protracted illness". I don't know much about Dr. Effendi, but the fact that Henry Hazlitt wrote a foreword to his book, "Hard Facts of History" says it all.

A friend from the Phillipines, Nonoy Oplas offered another obituary, saying that "I am sure Mr. Effendi died a happy man because there are now plenty of [us] who continue what he has started..."

Condolence.

MF on globalization, market, and externality

From New Perspective Quarterly:

New Perspectives Quarterly (NPQ): With globalization, are we seeing the freest world economy we’ve ever seen?

Friedman: Oh no. We had much freer trade in the 19th century. We have much less globalization now than we did then.

Will we go ahead back to this freedom of the 19th century? I don’t know. We have a freer world because of the collapse of the Soviet Union and the changes in China. Those two have been the main contributors to freedom in our time. The countries that have risen and separated out as a result of the collapse of the Soviet Union are, on the whole, following freer economic policies. Most of these states have freer government and less restrictions on trade.

This free-market base will likely expand from there by example to others not so free. Everyone, everywhere, now understands that the road to success for underdeveloped countries is freer markets and globalization.

NPQ: In the end, your ideas have triumphed over Marx and Keynes. Is this, then, the end of the road for economic thought? Is there anything more to say than free markets are the most efficient way to organize a society? Is it the “end of history,” as Francis Fukuyama put it?

Friedman: Oh no. “Free markets” is a very general term. There are all sorts of problems that will emerge. Free markets work best when the transaction between two individuals affects only those individuals. But that isn’t the fact. The fact is that, most often, a transaction between you and me affects a third party. That is the source of all problems for government. That is the source of all pollution problems, of the inequality problem. There are some good economists like Gary Becker and Bob Lucas who are working on these issues. This reality ensures that the end of history will never come.

Hat tip to Steven Levitt.

The Politics of Rice 15

This news strikes me. The Jakarta Police has launched a probe into the House of Representatives due to PKS and PDI-P's opposition against the government's decision to import rice. This is ridiculous. Yes, the parties' call for import ban was silly. But that doesn't give a right to the Police to investigate them.

If the Police wants to play cop, they should probe into another office. Think about it.

The Politics of Rice 14

So the government finally admits that Bulog is ineffective. Unfortunately, the solution is worse. Instead of doing something about Bulog, it blames the market. Says Minister of Ag:

"Bulog turns out incapable in driving down the price. Therefore, we need to re-evaluate market operation and rice import". -- my italic.

If only you say "...., we need to re-evaluate the existence of Bulog"... that would make more sense.

Inflation Update

The inflation data for January 2006 is up on BPS’ website. It is 1.36% month-on-month, or 17.03% year-on-year. This is slightly lower than LPEM-FEUI’s estimation of 1.44% and 17.12%. Unless the floods continue to halt paddy harvesting, we expect a deflation in February by 0.17%.

The Statistics Office (BPS) reported that the major driver of the high January inflation was rice price increase. HKTI and DPR, are you happy now? The Bulog’s rice import of 110,000 tons failed to stabilize the price. Again, it is proven that Bulog is ineffective. The solution to this should be straightforward. Don’t rely on Bulog. Just allow everybody to import. (I should’ve titled this post “The Politics of Rice 14”, no?).

In the meantime, people have started to make fuss on the likely increase of electricity rate. However, a 50% increase (already happened in some regions) in rice price is more harmful than 30% increase (popular estimate) in electricity rate, as far as inflation is considered. As we estimate, the former will add 4.3% to the inflation, while the latter 0.89%. But, the second round inflation should also be expected. It seems that the government doesn’t learn from past mistakes. By keeping silent on the exact rate of increase the government is again toying with people’s expectation. Last year inflation was driven more by expectation amid the uncertainty and mixed signals from government officials. Now, they’re doing it again with electricity rate.

There’ve been talks over the January’s inflation figure, that Bank Indonesia might increase its policy rate again next week. I would think it’s premature, even though it's not impossible, considering that the Fed has raised its rate to 4.5% last Tuesday.

BPS also reported that the 2005 export value hit a record high of 19.53%. We shouldn’t be overly happy with this. Note, the number reported is value. That is, price times quantity. Last year export was driven by mining sector, whose world price rose significantly. So it’s not that we exported a lot; only that the price was good. If we are for promoting more export (in quantity, not just relying on international price), we should continue cleaning up the mess in customs and duty clearance procedure.

Rules vs Discretionary

or... Friedman vs Greenspan. I can't let this go unnoticed.

Hat tip to Mark Thoma.

Democracy Bush and Blair Don't Like

The Economist has its right to be skeptical on the current development in the Palestine. It says, under Hamas, things will go worse. Well, that's an editorial judgement, and it's fine.

But it's different when it comes to world "leaders": Bush, Blair and the likes. As the Washington Post reported, Bush was "conciliatory". While Blair worries that Hamas might not practice democracy. Well, if you're concerned with democracy, first of all, you should respect the result of the democratic election. You like it or not, Hamas is winning.

[By the way, allow me for a word about Evo Morales, the new "hero" who just joined the Castro-Chaves Gang. I kinda not like him. But I respect the Bolivian people decision. Bush and his gang should learn to respect that, too].

Update: I just noticed, Posner and Becker are discussing about this, too, with economics. They apply Schelling-way of thinking and both comes to conclude that the world should not worry (too much) about Hamas victory. Says Posner, "Hamas' victory may be the best thing that has happened to Israel in years". While Becker says, "I am more optimistic than Posner and many others about the chances that Hamas' victory will improve rather than worsen relations with Israel."