The Chronicles of a Capitalist Lawyer

A recent blog post has caught my attention. It describes another usual day in Jakarta, complete with major traffic jams and motorcycle drivers using the curb lane. The writer, a pedestrian, says he was in a fight with a motorcycle driver who wanted to pass him and kept asking him to step aside.

Of course, the request was ridiculous. The lane has always been reserved for pedestrians, and they don’t have any legal obligation to let motorcycle drivers use it. Just when the fight was about to turn physical, a police officer came to break things up.

At first the officer scolded the driver, saying he was violating the law and could be fined. The driver simply replied that he would accept the punishment as long as the officer also fined other motorcycle drivers using the curb lane, and there are many of them.

Upon hearing that, the officer turned and instead scolded the pedestrian for his refusal to let the driver use the lane. It was a perverse result, showing that the officer was regrettably taken by the driver’s misleading argument.

We hear this kind of argument for fairness all the time. If you want to punish me, you should also punish the other people who are involved in the same crime. Or if you want to punish me, you should show that you’ve never done the same thing yourself. Is this argument valid when we’re talking about law enforcement?

The answer is no. From a legal perspective, I’ve never seen any serious legal philosophers who support the idea that in order to make a valid legal enforcement, legal enforcers must be saints and ensure that all people who commit the same crime will be punished at the same time.

From an economics point of view, it would simply be inefficient to have that kind of rule. Imagine the costs if we had to ensure that all legal enforcers possessed the moral capacities of a prophet, being a perfect person who absolutely adheres to the highest standard of moral and religious principles. Where can we find such a great person?

Pakistan would be good case study. Pakistani legal officials, who believe they act in accordance with the correct version of Islamic law (unfortunately, it’s not correct), have established a strict rule for becoming a witness in homicide cases. People can only be witnesses if they have certain moral qualities, which include, among others, praying five times a day, never lying and maintaining good hygiene.

The result? No one has ever been punished for murder under Pakistani Islamic law. Thankfully, that does not mean murderers can run away from their liabilities, because Pakistani legal officials still use the witness standards established under the English law, which is also applicable in Pakistan. But you see the point.

When police officers are dealing with cases like the one I describe above, they should realize that they can in fact punish a motorcycle driver even if they don’t do the same to other violators. By punishing one driver, they can set an example that they’re going to enforce the law, even if it’s in a random or selective way.

And such enforcement would be efficient. There are costs for law enforcement, and the optimum crime level might not actually be zero because at certain point, the cost for law enforcement might outweigh the benefits that we expect from reduced crime. This is called diminishing marginal returns.

Of course, there are situations where we might be required to increase the law enforcement costs for specific crimes (say, corruption). But for traffic violations? Having random or selective enforcement in this case would be sufficient to give the correct signal to violators.

Sometimes, uncertainty is effective to deter crimes. If you don’t enforce the law at all for traffic violators, they’ll think it’s fine to commit a violation as long as everyone else does, too. But if they know they might be punished, even if it’s just a possibility and not 100 percent guaranteed, they will think again.

Such uncertain law enforcement will increase the costs of violation and make people more likely to comply with the rules. That’s why law enforcement is still necessary, even when the process is random or selective. So next time a police officer faces a similar case, he should just fine the guy and say to him: “Well, tough luck, sir!”

Discussion on labor welfare and how capitalism abuses them is always a controversial issue. Some people argue that the existence of capitalism has usurped the quality of labor life, forcing them to live below standards, all for the sake of maximizing the profits. But is this claim correct? Does free market economy impose a significant burden to labor? My answer is no and we can explain this problem though the lens of the Law of Supply and Demand.

The basic economic concept that we must understand here is that whenever the supply of a product is rising but the demand is stagnant or cannot follow such supply, price tends to fall. The reason is simple, if we have a oversupply of products in the market while the demand is minimum, the seller will be pushed to reduce the products price in order to induce more buyers to purchase the products. Similar thing is happening in Indonesia when we talk about the supply of labor, especially the blue collar workers having low education level.

Consider this fact, Indonesia is the fourth largest country in the world in terms of population. From such a huge amount of population, how many people had the opportunity to get high education? How many industries that can absorb a huge numbers of population as their labor? Theoretically, if the number of labor intensive industries are not big enough, assuming that the amount of blue collar workers are huge, the labor salaries will be pushed down.

From the industry perspective, why bother paying the labor much as long as they can find easy replacement of the labor and to the extent that they can find many workers who are willing to work for a cheap cost in the market. Consider the example in the market for lawyers in big corporate law firms. This line of job offers a lot of compensation (of course in accordance with the level of work difficulties and intensity).

How could that happen? First, the resources for high quality lawyers are limited. Second, there is a huge competition between big law firms to get and retain the best talent. Since the demand is high while the supply is limited, we can easily conclude that the price of the product, i.e. the salary of corporate lawyers will increase substantially.

Now we turn to the main problem in this article. How could we increase the welfare of the labor? The short term solutions have already been done in Indonesia through its labor regulations. We have minimum wage laws and our labor position is quite protected in a sense that companies cannot fire their employees easily. Such policy limits the ability of the companies to find new cheap talents and will force them to invest more in the existing workers.

But such policy is not without any consequences. The fact that there are minimum wages and job protection is good for people who have secured a job. For people who have not secure a job, these so called "protections" will turn out to be problematic for them. Forcing a minimum wage might not be in line with the companies budget and they may compensate such problem by taking less workers. Furthermore, since they cannot easily fire a worker and find a replacement, they have more incentives to ensure that the current worker will stay with them, decreasing the level of taking new labors unless the companies are planning to increase their output by making new investments.

That is why we need a long term policy that will work for the future. There are two ways to affect the price of a product. We can adjust the demand side, or we can adjust the supply side. In terms of supply, it is imperative that we pursue the policy of having an effective birth control. Like it or not, birth control is very important. If we talk about mere products, we can simply put the excess products in the warehouse, but we can't do that with human.

Another thing that can be done is of course to invest more in human capital, increasing the education level of the population with a hope that this policy will reduce the number of cheap labors in the long run. I will not discuss though in this article what would be the best way to increase investment in human capital and how to finance the education costs as I already write the basic ideas here.

From the demand side, we can try to give more incentives to entrepreneurs and capital owners to invest in labor-intensive industries (at least in the short run). This brings us to the idea that the government should invest more in building infrastructure and reduce the costs of doing business in Indonesia. Through this policy, we hope that the level of demand can be increased to absorb the labors up to a level where companies are competing to get talents. As I discussed in the case of corporate lawyers, competition of getting the best talents will be beneficial for labor. But this will not happen if the education level is low and the industries scale is not big enough.

I believe that the most efficient way to improve the labor welfare is through the free market process. Government can surely help us in achieving that goal, but in order to do so, it should use the correct method and policy. Asking companies to pay more without any justification is simply a bad idea. It gives the wrong incentives and we cannot expect that such policy will actually improve the welfare of the society in the long run. Instead, we should pursue a policy that will work well with the Law of Supply and Demand. So the final question is: what will we choose?

The idea of impoverishing corruptors is not a new one. In fact our Anti-Corruption Law allows the state to confiscate the assets of convicted corruptors and requires them to prove that their assets are not the product of corruption in order to get them back. But this idea has been generally accepted with mixed feelings.

Some people believe that seizing the assets of corrupt individuals that were not actually acquired through corruption is a violation of human rights, especially when the state takes those assets for good. For them, the state should only take assets of corruption. I think this is a ridiculous idea, and I will tell you why.

Sanctions are sanctions. Why do we have sanctions? Because we want to impose costs on the criminals, we want to let them fully understand the notion that crime does not pay. Because if crime pays, people will have more incentive to commit crimes.

To achieve that, we must ensure that whatever benefits criminals receive, the state will take it back, and impose additional costs on them, making clear that the costs of criminal activities will always outweigh the benefits.

Furthermore, the lower the probability of getting caught, the higher the sanctions should be. Why? This is to compensate for the fact that some people might not get caught and therefore will suffer no costs for their crimes. Of course, we need to take into account this probability and let people know that if they get caught they will receive a higher punishment.

Having said that, I will argue that a prison sentence is not a cost-efficient type of sanction. The benefits of sending criminals to prison are highly questionable. The costs are very clear. First, taxpayer money is being used to pay for these criminal lives in the prisons. Second, there is no guarantee that prisons will change them into better people (at least in the current conditions in Indonesia). Third, there is always a possibility that richer inmates can bribe prison guards for their own benefit, simply because being a prison guard is not a well-paid job.

People should also understand that sending people to prison is actually a violation of human rights; you restrict the freedom of the criminals. Now if you can agree with prison sanctions, how could you say that taking the assets of criminals is against human rights? That does not make any sense.

I think this is the right time to think carefully about what type of sanctions we should develop in Indonesia and how we can utilize each type of sanction to deal with various types of crimes. Using prison and fines as the main sanctions is no longer enough. After all, all crimes have their own characteristics and underlying incentives.

The incentives that lead people to corruption might be entirely different from the incentives that lead people to, say, murder or rape. Understanding the incentives of these different crimes will help us in designing effective and efficient sanctions.

So let us return to the case of impoverishing corruptors. Money and other types of valuable assets are the bloodline of corruptions. Based on a simple economic analysis, we can say that people engage in corruption because they perceive that the benefits of doing so will be higher than the costs.

Suppose the value of your corruption assets is $20 million. Assuming that the costs of the sanctions multiplied by the probability of being caught is still lower than $20 million, economic analysis dictates that rational bad men will engage in corruption. This means that even getting back the whole $20 million would not be enough!

In addition, the people who argue against impoverishing corruptors say that the state should just recover the stolen assets. Again, this is clearly not enough. For each batch of stolen assets there are various opportunity costs for the government where the government could have invested those assets to generate more revenue. There are also costs for recovering those stolen assets. The law enforcement system is not free.

Thus, it makes sense that the state should not only recover the stolen assets, but also the expected profits and interest that it would have received if those assets could have been used by the government in the first place, plus the whole cost of the criminal proceedings. Meaning that if a corruptor takes $20 million, he must be required to repay a lot more than that.

I do not see any good reason why we should not impoverish corruptors. Sending them to prison without taking their assets would only add a burden to the state budget, and is not efficient or maximizing welfare. It’s time to think like economists when dealing with pricey legal issues.

The latest Constitutional Court decision on the Health Law is very surprising. It holds that public places must provide special places to smoke on the basis that people have the human right to smoke. I find this idea as simply preposterous and I am deeply confused on how come the Constitutional Court could make such decision. There are two main issues regarding the decision. First, whether smoking can be considered as a part of human right that is guaranteed by the constitution. Second, whether private parties can be forced by the state to provide facilities for smokers.

Let us begin with the first issue. Smoking is bad for health. No doubt about that. Many countries have already banned the sale of cigarette or heavily taxed the sale, giving less incentives to people to smoke. Even further, many countries have also banned smoking in closed public areas. If you want to smoke, you do it outside, be it in a hot summer or a freezing winter. Even in the United States I can confirm that it is very rare to see people smoke, even in opened areas.

Having said that, it is puzzling that the Constitutional Court can say that smoking should be considered as an inherent part of human rights. Since when? I do see the right to live, but the right to kill yourself slowly? Well that's a new thing. Constitutional Court can of course interpret the constitution, but it does not mean that they can develop a new right out of nowhere. Every junior law students would understand that the basic texts of the laws should be respected as they are unless there is a very strong reason to deviate from using such texts.

The Constitutional Court further argues that because the law has not deemed smoking as an illegal activity, it means that smoking is a right. This is completely wrong and illogical. Saying that an act is not prohibited does not automatically mean that such act becomes an inherent right of human being. If the law says that a dangerous activity is temporarily permitted, it does not mean that the law say that people have the absolute right to do such activity all the time. Instead, it should be considered as a special case, an exemption.

People know that cigarette industry contributes a lot of incomes to the state. However it is not clear whether the benefits of having the industry outweigh the costs imposed to the citizens health and the opportunity costs in case the money used to buy cigarettes can be directed to other useful means. That will not be the focus of this article, but I can say that it can shed some lights on why smoking is still permitted in Indonesia. There are too many stakeholders involved.

Furthermore, if we can develop a right to hurt ourselves, I do not see why the law should prohibit people to use drugs or to perform euthanasia? As long as they agree to do so, why punish them. In case of euthanasia, why the criminal code punishes people who assist someone in their suicide attempt? Saying that the right does not exist because the laws deem these acts as illegal will not make any sense. If the Constitution says that the right to die or to hurt yourself exists, the Constitutional Court should declare that the above laws illegal for contravening the constitution. As simple as that. I wonder though whether the Constitutional Court will be brave enough to do that.

Now some people argue that actually smoking is not dangerous to our health, that it is a part of a bigger conspiracy, and therefore the argument that approving smoking is the same with approving the right to hurt yourself should be rejected. Again, I don't see any good reason why there should be a conspiracy for banning cigarettes. Basic economic analysis can show the flaws of this conspiracy theorist.

In a capitalistic world, profit is the most important thing. People can even produce hazardous materials for the sake of profits, as long as they compensate the victims for hurting them (due to the hazardous materials). In law and economic terms, we call this as the liability rule. If that's the case, why many developed states should bother with the cigarette industry? As long as they can compensate the victims, who cares. Furthermore, as long as they can pay a huge amount of money to the state in the form of excise tax, why restrict them from selling the cigarettes?

The answer is quite simple. From economic points of view, these states deem that the costs of having the cigarettes industry in their countries outweigh the benefits. Cigarette companies are not stupid, they have a very strong lobbying power, and yet, as an interest group, they fail to induce the developed countries to maintain their existence. This means that the costs of having them in such countries are so high that even the benefits that they provide cannot justify their existence. Each countries might have different views on this issue, but you can see the point.

Now, let us move to the second point. Can the state forces private parties to provide special places to smokers? I am a defender of people's freedom and I will clearly say this: the state should only be permitted to force private parties and its citizens to provide something for other people in special cases where the benefits are clear and outweigh the costs, and the provisions of such facilities are highly important for the sake of the people. None of these points are satisfied by the recent decision of the Constitutional Court.

And I find this fact as deeply problematic. How could we let the state force us to provide something without clear benefits? It's already perverse enough that we must acknowledge the right to smoke as a basic human right, and now the Constitutional Court says that we should also provide the facilities for the smokers? I mean, like really?

Some people say that since the majority of Indonesian people are smokers, it is fine if the state should provide facilities for them and that other non smokers should respect that. Well if you agree that the majority opinion should dictate anything in this country no matter what, you should not protest if we see cases where people using their status as a majority to oppress the minorities (like in the case of minor religious sects or LGBT groups). Hey, we're the majorities anyway, it's your task to respect us, and we should be free to do what we want since we are the majorities. You do realize that adhering to such principle would be a disaster.

Every aspiring law students realize that absolute power tends to corrupt absolutely. That is why we need a check and balance mechanism. People are not angels, and if we always let the majority to decide anything without proper counter measures, that would be a perfect recipe for oppression. In short, the latest Constitutional Court decision is regrettable. Making a wrong policy is one thing, after all not all judges are equipped with such skills. But making a wrong legal interpretation that every first year law student should know? That is absolutely unacceptable. Well, the fight is still going on. Let us see how the central and regional governments will deal with such issues.

I wonder how many people are aware of this, but our Legislative Board (DPR) is currently in the process of drafting a law on gender equality. I take this news as a positive, development and I hope that the law can be soon promulgated.

What concerns me are the various critiques made against such laws based on the notion that women’s and men’s rights and obligations are not the same, especially in the family. Thus, these critics urge that the state should instead maintain a division of tasks between men and women in a family, which of course has been stipulated under the marriage law.

This is indeed a pity since there are two major misconceptions relating to the above notion. First, people may believe what they want to believe, but it’s outrageous to ask the state to regulate how people should manage their family matters.

While Islam provides certain guidelines on how husbands and wives should interact and how they should manage their family, from a legal perspective, Islamic law does not provide any penal sanctions to a couple who chooses to use a different method of family management.

This is in line with my thesis that Islamic law is efficient (research that I currently pursue). That is, while Islamic law provides moral guidance, it will only provide penal sanctions when there are clear net social losses caused by an act.

A good example is this: There is a penal sanction for being drunk, but there is no sanction for eating pork, even though both are prohibited under Islamic law. Being drunk can produce a net loss to the society — even the United States acknowledges their drinking problem.

But eating pork? While some might argue that the prohibition is related to health problems, in general, it’s a personal choice to either eat it or not. In short, it is your own responsibility to assess the costs and benefits of eating pork, including its effect on your own health. But that’s it, there are no clear social losses caused by eating pork.

I think the same view is also adapted by the current marriage law. While the law still tries to make a division of labor in the family, there is no sanction for those who do not comply with such a rule, meaning that people are generally free to choose what they want to do with their family management.

This brings us to the second argument. From an economics perspective, it would be more efficient for a couple to decide by themselves on how they will manage family matters, simply because they know best about their own affairs. You can’t expect the state to be an all-knowing entity that can determine what is best for a person.

I am not against women being housewives, but I am also not against women having a career outside the house. What really matters to me is that whatever the choice is, it should be made consensually between the husband and the wife. And to achieve such purpose, of course, they should have equal position.

Imagine this, suppose you think that you want to become an engineer, and you are currently pursuing an engineering education. Suddenly, the government tells you that after further deliberation, they’ve determined that you are not suited to become an engineer, and that you should be a singer instead. Even worse, the government forces you to be a singer. Would you agree to be treated like that?

I will say this: If the government has the capacity of God, is able to know everything up to the sub-atomic level and can predict the future with 100 percent certainty, I will support the idea that the government should determine what we should become — it should select only the best of the best, and those untalented people should just work as blue-collar laborers.

Fortunately, the government does not have such capacity, and even we know that God does not force a person to follow certain paths simply because God respects human individuality. Various Islamic sources confirm this, such as the case of Noah’s son who refused to hear his father’s plea, and died during the great flood.

Even a prophet cannot bring his own son to follow him. How come? Because each man is responsible for his own deeds, and God lets people decide how they will assess the costs and benefits of their own actions. That’s further evidence of the notions of efficiency in Islamic law. So let the family decide by themselves. Remember, you can preach, but you can’t force. It’s as simple as that.

A recent article in Gizmodo attracted my attention. The author told us that he lost his faith in humanity upon finding the fact that some kids actually thought that Titanic is only a fictional story. While I understand that the author was exaggerating his point. It still raises a fundamental question. Is this the age of information overload? Is this a good thing or a bad thing?

The above story reminds me of a scene in Slumdog Millionaire where Jamal, the main character, was interrogated by the police officer on how he could answer the various difficult questions in Who Wants to be Millionaire Quiz when he does not even have a clue on who Gandhi was. And Jamal's answer was sensational, "I might not know who Gandhi was, but do you know the bicycle thief on the road in front of this police office?". In short, Jamal explains to us precisely that each person simply has his or her own niche in terms of general knowledge.

And I guess in this age, having such niche is very important. You can't judge the knowledge of a common person only by the level of his general knowledge on certain events. Yes, it seems foolish that the kids do not know about Titanic. But consider this. Suppose you, a city dweller, go to a village where the farmers know how to produce milk and crops. You watch them do their work and then you are amazed when you finally understand for the first time how your milk and rice are produced.

Now these farmers would probably think that you are an idiot based on their standards of knowledge. From the farmers' perspective they will say something like this: "come on, how come a man does not know how to take milk from a cow? It's common knowledge anyway". Though I doubt that they will lose their faith on humanity simply because you don't know how to get milk from the cows.

An Economist, Thomas Sowell, once said that the best sign of modern development is the fact that modern people need less knowledge in order to maintain a good quality of life. In the past, in order to survive the world, a man must have different set of skills, he must understand the nature, how animals behave, how to produce crops, how to cook meat, how to build houses, etc. How about now? I bet that most of us don't know a damn thing about how to survive in the wilderness or how to produce our own foods and clothes from scratch.

We simply depend on other people with better comparative advantages to produce those things for us and we do what we think are best for us in accordance with our own skills. And this is in line with economics rationality. Why bother spending our resources on something that can be better done by other people? Unless the benefits of doing so exceed the costs, we would most probably choose to do something else.

And the law also works under the same logic. When we are trying to impose certain liabilities to certain people for negligence, judges are required to adopt a standard that is common to such people under their respective categorization. You can't impose a professional's standard to an ordinary guy in doing their job. Everyone should be judged based on his reasonable skills. Only then we can produce an efficient result.

Even when we are talking about the standards of knowledge for professionals, we cannot expect them to know everything. As an example, I am quite confident with my knowledge on securities laws, corporate laws, and Islamic laws, but I am not an expert on say, intellectual property and real estate laws. And it would be foolish if I push my luck on those fields by giving formal advice to my clients without proper preparation. In fact, based on comparative advantages, it would be better if I just assign those intellectual property cases to other lawyers who are more knowledgeable than me (which is also encouraged under lawyers code of ethics).

If we want to be concerned with our generation, I say it's not about the amount of knowledge that a normal person should have, rather we should put more effort on understanding and improving how people think. This is an age where knowing a lot of things is good, but knowing how to effectively find the sources of knowledge is better. What is really important is how people will utilize such knowledge in order to maximize the welfare of the society and produce efficient results.

Thus, teaching people how to think should be the priority. How to analyze things, how to have a healthy skepticism on various issues and beliefs, how to induce people to think creatively and to focus on solution-oriented thoughts. These are the things that will redefine our society for many years to come. It would be useless if we have a lot of people who know a lot of things but don't even have a single clue on how to utilize such knowledge.

So, forget about the Titanic issue. Whether it is based on true story or not might not be highly relevant anymore in the future. Instead, we should teach those kids to understand that people should do their best in reducing the level of human error in the transportation business in order to avoid a case like Titanic and how we can formulate a good policy to reduce such type of accident. One thing for sure, I still have a lot of faith in humanity.

Although the House of Representatives on Friday rejected a plan to raise the price of premium subsidized fuel, the government can still raise the price in the near future. This may delay another debate on whether we should cut the fuel subsidy. Unfortunately, the current global price has continuously risen, and the price of non-subsidized fuel has significantly increased.

Considering the price discrepancy between the two types of fuel, and assuming that the difference in their quality cannot be easily distinguished, it does not take an economist to conclude that people will likely (if not certainly) purchase the cheaper option. Surely, no rational person would believe that asking people to be ethical by not purchasing the subsidized fuel would work without any legal sanctions.

The question then is this: Would sanctioning those who buy subsidized fuel and can afford the non-subsidized option be a good idea? I believe it would not be wise at all.

First, the consumers of subsidized fuel come primarily from the middle-class. These are people who will have difficulty adjusting their lifestyle with the rising fuel price. Those in the upper class don’t have any problem paying for fuel, and might not consume the subsidized product in the first place.

But penalizing people for buying subsidized fuel might be dangerous — there would be too many targets to cite, and the costs of legal enforcement would be excessive. If people are cheating the rule and buying subsidized fuel, how many legal enforcers should be created, deployed and paid to combat them?

Furthermore, a penalization system might increase social unrest, especially if the government ends up punishing people for something they feel they naturally need. That could potentially be another huge cost to society.

Also, if we impose penalties on those who buy subsidized fuel, why bother maintaining the low price? Imagine the inefficiency of such a system. We spend money maintaining the subsidy, and then we spend more money enforcing the law in order to ensure that only needy people buy cheap fuel. It doesn’t make any sense at all. These are double expenses with unknown benefits.

Another way to induce people to buy non-subsidized fuel is to require insurance companies to cancel or reduce protection for cars that use subsidized fuel. But the problem with this solution is that we need to make sure insurance companies will cooperate, therefore spending additional money to supervise the insurance companies — again spending more money trying to save money.

In addition, if the price discrepancies keep increasing, the above measure will be less effective since people will likely treat the costs of losing insurance as a future probabilistic matter, while the high fuel price is the current problem they face. In short, they will have more incentives to choose facing future risks rather than facing the problem now.

Let us make this difficult situation as easy as possible. The main problem with having different prices of fuel at the same location is that it is almost impossible for us to ensure that only the right targets will benefit from the subsidy. You can not fight human nature to pay as little as possible for goods. And I’m quite certain that politicians, who by their very nature must pander public opinion, would never agree to penalize consumers (who are also voters) from buying subsidized fuel. Increasing the price is one thing, but criminalizing people would be an unacceptable threat to future votes.

This problem would never occur if the government did not create an excessive market distortion in fuel supply. After all, it would be easier for the people to adjust to the change when those changes are gradual. Shock therapy rarely produces a good result, and often comes with huge sacrifices.

I think this is the right time to be realistic. Unless the government can find a quick way to make a lot of money, maintaining the subsidy is a bad idea — but criminalizing use would be a recipe for disaster.