Economists "do it" with models

A week ago, I was entering the quiet study room in campus trying to cram for my econometrics exam which will be held in the next two hours. As I sat down and put all my books on the table, I gazed into the blackboard in front of me and started to laugh quietly. Someone had scribbled numerous equations along with graphs and on top of it was these words “economists do it with models”. I know these words may not seem as funny to others, but to me it was very entertaining.

To those of you who may not yet familiar with economics, the way economics explain or try to explain daily phenomena is by using models. Models in this sense are not what you perceived as good-looking men or women walking on the catwalk or in the pages of magazines. Rather, they are basically a formal statement of a theory. Now, theory basically is a general statement of cause and effect. And models are based on theories to explain how the world works. So, what is a good model then? Well, a good model is a simple one and yet practical. One of the examples of a good model is the supply and demand framework. It is simple and practical.

Now, do economists really "do it" with “models"? Perhaps, I don’t know, maybe.

Coerced voluntarily??

Summer holiday is close to end (in Australia summer starts from December to March). I’ve planned to spend holiday by doing some projects and, actually, I made commitments with my colleagues already. But, I found myself as a procrastinator. During the first-two months, I spent my time almost on fruitless works, not including time spent for traveling around Melbourne, Sydney and New South Wales. Nothing came up on my head at that time.

At present, I’m in Jakarta and back to my office, the Centre for Strategic and International Studies (CSIS). Perhaps it’s a bit strange, I’m not a workaholic but I really enjoy spending my time at CSIS. Surely, there’re many reasons. One is the atmosphere. Well, the people are very informal (never think of us as very nerd people) but we, very often, think ‘trivial’ thing academically.

In addition to getting back “the atmosphere”, my visit to CSIS is also related to my research with Pasha. Pasha and I are doing research on Indonesia’s macroeconomic issues. We study the relationship between inflation and unemployment. It’s a classic study because, if you are an economist, you may familiar with this kind study, i.e. Phillips curve. Yet we are interested more in finding whether the Phillips curve really works in Indonesia and if so what the “true model” of augmented Philips curve is. From CSIS, I can get my stuffs (data, I mean).

I also have my own research. At the moment, I study the participation of married women in labor market. One of my research questions is how strong the magnitude of number of children on labor market variables, for example, wages.

I utilize two-stage least square (2SLS) by using instrumental variables because of endogeneity problems (I apologize for common readers if some issues in this topic are quite technical). I realize that the number of children is no longer exogenous. In fact, it is determined by the bargaining position of wife within household.

Studies on women, fertility and patriarchy society find that high fertility in male-dominated society is because of unequal power within household and males tend to pro-natalism (for example Nancy Folbre, Patriarchy and Fertility Decision. Feminist Studies vol 9 No 2, 1983).

Shortly, I want to test this hypothesis empirically as well. As I use National Socio-Economic Survey (SUSENAS) from Badan Pusat Statistik (BPS), information regarding bargaining position, unfortunately, is not available. To solve the problem, I use age difference and years of schooling difference between husband and wife as proxies of bargaining power. These variables plus age at first marriage work as instrumental variables.

Early finding shows that the magnitude of children is higher in 2SLS than Ordinary Least Square (OLS). Indeed, specific OLS estimate suggests that children have no significant effect on wage (I think this is because of endogeneity problem resulting in high standard error). Correcting variance and standard error due to SUSENAS sampling design and endogeneity issues, 2SLS agrees with theory that children reduce married-woman wages. However, I still work on econometric issues and make sure I don’t make two types of error, which always become econometrician’s caveats.

But, what surprise me is the variable “the years of schooling difference between husband and wife” is no longer random variable. There is a pattern that low educated female tends to marry male who has relatively higher education than them. In other word, the educational difference is getting smaller as wife’s education is getting higher. If the pattern is consistent, there are, at least, many reasons but one serious implication.

One reason is that, as male is expected to be the head of household, female thinks that her potential husband should earn well-income. In the language of household economics, rational wife will maximize her expected utility of the expected income of their potential husband.

In other word, female, particularly low-educated female, seeks potential husband who potentially offers her a settled-living condition. It is truly sensible.

However if my variable, the gap in education between husband and wife, is a good indicator for describing bargaining power (bigger the gap, lower the wife’s bargaining power), this shows that low-educated female is likely to trade her bargaining power for material gain.

One serious implication from this fact is that, high fertility among low-educated female may be caused by forms of patriarchal oppression which are coercively pro-natal, as suggested by Nancy Folbre (1983). But, in fact, it happens voluntarily. Low-educated female is self-selected of being potentially coerced by their potential husband.

That is my presumptions and not final conclusions. Many works should be done before ending at good conclusions. However, it convinces me that I’m going back to Australia without an empty head.

Again….a new deal on a dangerous thing

This is an old article. I wrote this a week after North Korea broke a commitment with the six-party talks in 2006. Some issues may be obsolete, but hopefully, the idea is still relevant. Another thing, this is my first time writing about international relation issues and regional security. What attracts me the most is the way of economic approach, particularly game theory, in deciphering our complicated world.

Recently, The Economist writes an issue about a new deal in the six-party talk. It seems to be skeptic that the deal will bring lasting stability in the region. Yet, that is really reasonable. Below is my article

Proliferation and Sanctions over North-Korea:
Economic approach on International Relations

The UN anonymously decided to take punitive actions over North-Korea. The UN realized that such universal pressures are needed to keep stability in the region. But the US went beyond. It considers that old-friends’ (China and Russia) pressure may much more powerful than what other countries in the region do. However question over China’s commitment remains.

Condolezza Rice’s visit into China recently seemed to send a signal that China’s roles after the test are far more important in the six-party talks rather than other countries involved. Yet, how far China really commits on the sanctions over North Korea is still vague. After the anonymous UN decision over North Korea, China called for selective sanctions and warned that harsh pressures may escalate tension.

China statements can easily be predicted. A mistake of old-good friend should be forgiven. Unfortunately China already sent a message to North-Korea’s leaders that sanctions may not toughly be imposed. That is why Kim Jong Il is likely to swaying with the wind by pledging for not testing nuclear weapons to China but at the same time celebrating the test success.

If so, can we expect that North-Korea will not repeat belligerent actions in the future? Moreover will sanctions over North-Korea be the most optimum way in creating lasting stability in the region?

International sanctions, particularly on economy, might be the first best option for a country defecting international stability. This option is likely desirable on the state level. Yet, international sanctions on undemocratic society leave a dilemmatic situation. International community should not put the sins of the country’s leaders on the people’s shoulder. We know that Kim Jong Il or other North-Korean leaders power are not based on North-Korean’s consent.

Moreover, The UN’s World Food Programme (WFP) working on North-Korea food program reported that North-Koreans have long lived with miserable condition. More than a third of children under age six are underdeveloped. Situation has been worst even when its neighbors dispatched regularly basic need of North Korean (the Economist 21/11/06). Recent international sanction undoubtedly will dig hole for the North-Koreans.

We also know that Kim Jong Il is a thorn of stability in the region. His regime has made North Korea such that its actions represent Il’s perspective over the region. Hence predicting North Korea actions are always inline with finding what Il think of.

Tracing back North Korea’s aggressive action in the past, including the launch of Taepodong 2 missile last year and recent nuclear test confirms that Kim Jong Il tends to use conflict intentionally for bargain. By doing this, he realizes gains and strongly points out the benefit of creating conflict.

What Il has done is similar to a game of what economists and game theorists call “tit-for-tat-strategy”. Tit-for-tat strategy suggests that one may cooperate if his rival cooperate and defect if its opponents broke a commitment or did nothing in the last period. Here, game theory approach may contribute in explaining Il’s behavior

Regarding nuclear issue and game-theoretic approach, Kenneth N Waltz’s ideas on nuclear weapons perfectly exhibit game theory approach. He suggests that more nations with nuclear power may make international system better in stabilizing system and reducing the probability of outbreak war among nations. He also argues that nuclear weapons dissuade countries for going to war more surely than conventional weapons and nuclear power has reversed the fate of strong and weak states (Kenneth Waltz, Nuclear Myths and Political Realities, 1990). Hence, Waltz assumes that one country’s best strategy would depend on the other countries’ best strategy. Nuclear weapons may promote stability and ‘Nash-equilibrium condition’.

Looking back at the issue, we may find that long history and ideology already made permanent instability in the East Asian countries. With or without North-Korea weapon issues, instability in terms of political or military tension in the region may still exist. However, the imbalance of weapon level held by the countries involved encourages the Kim Jong Il’s willingness to trade outbreak war risk for domestic gains.

Therefore the second best option is to change the way of bargaining with North Korea including deterrence action of other countries, particularly South Korea and Japan. Deterrence action over North-Korea may be effective by reducing its tendency of aggressive action and increasing the probability of retaliation. South Korea and Japan which are considered standing on the US side probably are better to rethink their deterrence policies particularly regarding arm races and nuclear proliferation policies.

Deterrence action, in the end, is concerned with influencing the choices that one country will make by influencing its expectation of how other countries will behave. Here the deterrence actions of Japan and South Korea should be intended to change Il’s mind concerning the distribution of power in the region.

However this way is unlikely to be popular option in international diplomacy. First, outcomes of this policy are uncertain and policy-makers in the region are risk-averse. This is completely different from Kim Jong Il style as a blatant risk-taker and the first mover. Kim Jong Il recognizes the advantage of being first mover.

Second, international community still puts great hope on the six-party talks and seeks for peaceful diplomacy. However, the launch of Taepodong 2 missile last year and recent nuclear test showed clearly that the talk may not be as effective as we think in creating stability. It happened as the countries in the six-party talks have their own agendas which are very often counterproductive over the issues.

Undoubtedly, one should highlight that the second best option should be taken deliberately. However, international community should seek for effective action beyond international sanctions and not punch the wrong heads.

Economist’s ethics and scholarly community

A close friend of mine writes a good article related to ethical issues here. He calls economists for being humble. Albeit economics offers “hard” approach in predicting human behaviors, in fact, post-factum evidences do not rarely fail to comply predictions. Becker’s proposition that one of good use of economics is its predictive power of human behaviors may be not correct at all. Some failures may happen, but it does not necessarily mean that economic theory is completely irrelevant. A theory is also piled up from mistakes, including prediction mistakes.

When he writes the article, I’m not really sure whether he describes Indonesian economists or economists as general. But I suspect, he says about Indonesian economists. Well, if it is true, I’m not surprised as there are plenty explanations.

It is worth noting that defending your hypotheses is not the same thing as being arrogant. The opposite is still true, that accepting your limitation should not be considered being defeated. The bad things, I think, are first: propositions without scientific or empirical methods, second: quantitative approaches without logics and rigorous theories (I call them as just-for-looks like complicated approaches), third: empty arguments. So far, I hardly find these three things in western academic culture. As a matter of fact, I always see self-recognition over the limit of arguments (please see in every conclusion part of articles).

Perhaps, we meet some stubborn and arrogant economists (let’s say Milton Friedman and some Chicago school economists).Yet they never do three bad things above or one of them. Alas, three bad things are commonly found in our academic culture.

Another issue, this is the oddest thing about Indonesian academics but it happens anyway. Some of our academics, if not most, seem to be reluctant revealing their methodologies and data. In science, hypotheses are valid only and if only the replication of research can be made. Otherwise no hypothesis can be said scientifically proved. Replication, moreover, is only possible as data and methodology are available. So that other researchers have a way to replicate or test our findings. Yet more than that, methodology and data disclosure always generate new research. Actually, this is how knowledge works.

Concerning odd-behavior of our economists (or other academics), my friend seeks for moral solutions. Moral obligation and ethical howls probably work, but I doubt it solves the main issue. Why? As economic theories suggest, self-interest is seldom inline with moral values. Changing the incentive around them and creating competitive market for ideas may result better.

Creating competitive academic environments is the answer but it’s really a hard-work. To get there, we need some diligent academics (economists or econometricians) who are concerned more with methodologies and, as suggested by Paul Krugman, they serve as a watchdog to get rid of the three bad things from our academic environments. True, it is a long journey, but hopefully it is not unfeasible.