Paying More for Less: Understanding the Correlation between Big Payment and Work Performance

About a year ago, I wrote a short article on whether there is any relationship between guaranteed high bonus and excessive risk taking by the management of a company. You can see the post here. Basically, such guaranteed high bonus gives a negative incentive to the board of directors to take higher risks in order to gain better benefit for the company. While higher risks might be translated into higher profits, they can also cause higher costs and losses which would trouble the company and the shareholders. In other words, big payment might actually produce worse results.

Apparently, Dan Ariely, a Professor of Psychology and Behavioral Economics at Duke University, has a similar view on this issue, though he reached the conclusion from different perspective. In his latest book, The Upside of Irrationality, he discusses his experiment which more or less shows that higher payment does not always work. The experiment was conducted in India, where several participants were asked to play some games in which they will receive financial compensation if they completed certain objectives within the games. The tests were divided randomly into 3 categories (the games were same, though), the first category gave very small payment (equal to payment for 1 working day in India), the second category gave mediocre payment (equal to payment for 1 week of work), and the third category provide the highest payment (equal to payment for 5 months of work). FYI, the average costs of one month living in India is US$11, so 5 months means US$55. That's why Dan had enough funds to conduct his research :).

What's the result of the experiment? Well, you might have guessed this: statistically, those who play the games in the third category end up as the worse players. It seems that the thought of having such a huge payment in the end of the game gave them a huge pressure, so huge that most of them fell under the mental pressure. This is interesting and yes, I can relate this to myself. As an example, when I do online shares trading, the bigger the stake is, the harder I make the final decision. It is a very stressful experience! The case is different when the stake is low, and I definitely can make a better decision in such case.

Therefore, it is quite easy for me to understand the result of the above experiment. When you know that the stake is very high (i.e. the end rewards), there is always a possibility that you will fall under the pressure which eventually will affect your overall performance. The similar thing can happen to those CEOs who are promised with guaranteed big fat bonuses. Since they need to establish a sufficient evidence that they are worthy enough to receive such payment, they take actions that might be riskier which then turn out to be a deep trouble for the company. Hence, lower performance.

I must say that Dan Ariely experiments entertain me most of the time. Like it or not, men are not always rational. There are certain conditions where our rationality might be defeated by our impulse. Only by accepting this fact that we can actually improve ourselves from such weakness. For more information, I suggest you to quickly buy the book. It's available in Times, as far as I know.

Tweet Series: My Rants on Lawyering

I've been twittering for some time and realized that Twitter is a really bad choice for storing your thoughts. So, in order to preserve some of my ideas there, I will post my tweets collection from time to time here, starting with my Lawyering Tweet Series. Enjoy :)

As a lawyer, you can be as smart as possible, but if you can't get the deal done, you're useless. As simple as that.
A partner said that lawyers should have high sense of client belonging. Well, if I get the client credit, I'll treat them as family!
To move to the next level, lawyers should never forget to do good marketing, since partnerships are offered to rain makers.
So we're having a session on being a Happy, Healthy and Ethical Lawyer. I tell you one thing. Stop the crap, and pay us more. Case closed.
Lawyers will never get a balanced life from some trainings, but from proper work distribution and efficient working system.
If you're a good lawyer, client will trust you no matter what. Appearance sure helps, but only for the first meeting.
Any good lawyer knows that the purpose of contract drafting is to reduce or even eliminate any potential dispute, not to create one.
It is a tragedy that qualified lawyers who understand the law must work under laws made by unqualified people.
What is the joy of becoming the best lawyer in town if you are merely a spokesperson of some bad and stupid laws?
A lawyer who can't write properly is like a chef who can't cook.
Being a lawyer requires great intelligence, persistence, and diligence, but none of them would be helpful if you don't have the passion.
Quality of life is a bullshit for lawyers. If you're complaining of not having it, you definitely work in the wrong area.
A lawyer cannot be considered as smart if he cannot produce other smart lawyers.
A lawyer who doesn't know that his job is risky is a dumb, but he is still better than a lawyer who knows the risk and doesn't take it seriously.
What is the first thing to do when a lawyer receives a new assignment? Review it? Make a summary? Nope, request the client matter number!!!
Commercial pragmatists are the future of lawyers: those who can blend smoothly in-depth legal knowledge with practical commercial skills.
To know whether a lawyer is good in making a legal opinion, look not at the content, but on its assumption and qualification.
A little advice to fellow lawyers, never assume that your clients know your assumptions. Assumptions were made to be written not assumed.
As capital market lawyers, our main task is to make proper public disclosure, not fixing all problems. You're not God.
Fellow lawyers, remember this: someday all of our extreme hardship and long hours shall become stories for us to laugh. Be patient!
A first class lawyer is not he who knows everything but he who knows when to stop and say "let me check that again."
Lawyers should be ambitious with their career. Without any ambition, you'll soon forget why you're here in the first place.
Lawyers' dedication comes from belief in excellence. But it must be supported by good rewards. We're not monkeys that you can pay with peanuts.
To be a great lawyer, focus and be an expert in at least 1 particular subject. Being a jack of all trades is only good if you're a clown.
A lawyer needs to maintain his sanity to have a long term career. At certain point, take a nice break and enjoy our life for a while.
For lawyers, clients should always be number one, but don't be naive and make unnecessary sacrifices cause they aren't everything.
A lawyer should master the art of covering-my-own-ass before he can master the art of giving-the-right-solution.
It perfectly makes sense for lawyers to complain on their job. What unusual is the people who think that those lawyers are exaggerating.
In case you have not realized it, there is a limit to which a lawyer can be held responsible for his deeds.
Lawyers are paid to give advices that can be understood by mere mortals. If your lawyer confuses you, you definitely pick the wrong one.
A good lawyer would never choose to advance slowly in his career, as he will always aim for a great leap to fame and fortune. Be ambitious!
Lawyers are problem solver. If you think you're good only for succesfully spotting issues, you're still a half baked lawyer.
Three basic foundations of a law firm: Capital, People, and Reputation. Losing the latter would have the most devastating impact.
A good lawyer knows that the first draft is always a rubbish. It is through continous review and amendment that we produce a masterpiece.
Lawyers' creativity is not granted, it is obtained from countless practices and accumulation of knowledge. There is no short cut!
A good lawyer must be knowledgeable and well versed in many issues, but he understand that it doesn't mean that he knows everything.
A partner might be the most brilliant lawyer in the world, but he is still one person. Without having a solid team, he will certainly fail.
What's the secret of creating the best firm? Recruiting the best people and maintaining them with the best incentives.
I don't care where you come from or your past achievements. What I care is whether you are a good lawyer or not, now and in the future.
For lawyers, the respect from one person is far more valuable than acquaintance with 100 people. Cause the first will be your loyal client.
You work products reflect who you are. While there is always a chance to fix them, why not give a great impression from the first?
Lawyers, your transactions are your portfolios. Make sure that they and your role in them are well recognized by existing and future clients.
A lawyer can't progress to the next level if he can't articulate his ideas in a systematic way.
Lawyers are advisor not decision maker. Our job is to give our best advice and let the client to decide. As simple as that.
What is the biggest asset of a lawyer? A genius mind? Relationship mastery? No! Reputation. Hard to build, easy to lose.
A commercial pragmatist lawyer will try to satisfy the client's commercial needs to the extent possible without breaching the law.
The best part of becoming a lawyer is the fact that the subject of law is pretty much unlimited, there are always new things to learn.
As a lawyer, if we can't do what the client wants, inform them immediately and make them understand. Don't sacrifice the relationship.
In lawyers' job, there is no bullet proof mechanism from making mistakes. Thus, be creative in preparing your ass covering strategy.
Knowing the fee structure of each assignment is essential for lawyers, so they can bill their work efficiently and appropriately.
A lawyer should plan his career from the first day he entered the job. After all, the ending path is always visible, what matters is how?
A good lawyer should know his limit. If you feel you can't handle the workload anymore, do not hesitate to shout it to your boss.
If you're a lawyer, you'll eventually learn that in terms of acquiring knowledge, the sky is the limit.
Clients confidentiality must be maintained by lawyers. If you can't be trusted with their secrets, how can you be trusted for other things?
Actually, lawyers should be prioritized in obtaining scholarship, because a good lawyer is essentially a better legal scholar.
I learn that in term of quality, there is no significant difference between us and foreign lawyers. It's about the correct exposure.
A law firm's opinion must be unanimous, thus no lawyers in such firm can issue a dissenting opinion. I too am obliged to follow that rule.
For some lawyers, lawyering is a way to earn living, but for some others, lawyering is a way of life. I am for the latter.

On Why Prison is Overrated in Solving Corruption (Indonesian version)

Here is another piece of article in Politikana discussing the latest sanction for Anggodo. I am more and more convinced that we need a better form of sanction rather than sticking with prison.

Legal Analysis Tool Kit Series: Understanding Ex Ante Perspective

A robber goes to a bank, takes a hostage and demands the bank teller to give the money or the hostage will die. The teller looks at the amount the bank holds, US$3,000, a petty amount of cash for a bank as big as this. But he refuses the robber's demand, and quickly rings the alarm. The robber goes panic, shoots the hostage and runs away. A few days later, the heirs of the hostage bring a suit to the court, asking the bank to pay a huge amount of damages due to the negligence of its teller. According to those heirs, considering the amount of the cash, it is not worthy to let the robber killed the hostage, so based on fairness, the heirs have reasonable arguments to claim the bank for damages due to the failure of its employee to make the right decision. Assuming that the there is no exact regulation concerning the claim, what should the court do?

Although the court might have unlimited options, in reality, all of those options can be simplified into two category, to look backwards or to look forward. Looking backwards or using the Ex Post Perspective means that the court will only review how the event occurred and decide what to do about it or how to clean it up. Using this approach, the above case will be considered as a simple dispute between parties. One will win and one will lose. The court can look at past precedents or try to define what fairness really means based on various methods. In the end, either the bank or the heirs will come as the winner, and the case stops.

The other option, looking forward or using the Ex Ante Perspective means that the court will consider the effects of its decision upon this case in the future, particularly on parties who might enter into similar situations and have not decided what to do, and whose choices may be influenced by what the law will say upon such case. This means that the court must carefully consider the incentives it may create through its decisions to other parties that might be affected by such decision in the future.

Now, let us try to analyze the above case using both perspectives. First, let us use the Ex Post Perspective. Since we won't put much attention to the effect of the judgment, all we have to do is trying to analyze the case based on sources which have already existed before the event. We can try to find the answer from regulations and precedents. Or, because we have already made an assumption that the regulation is not clear on this issue, we can turn to the opinion of scholars and famous literature discussing this issue. Further, we can work on the most acceptable definition of fairness and try to implement such definition in this case in order to answer whether the teller's refusal to give the money to the robber is a fair action or not, and if it is not fair, whether the bank should pay damages to the heirs. Quite complicated, I must say.

What about using the Ex Ante Perspective? Try to think the immediate effect of the court's decision if the court decides that the bank must pay a huge amount of damages to the heirs and suppose such decision becomes a final and binding precedent. This decision will affect other similar cases where robbers are holding hostages for the sake of getting money from banks. Logically, other banks will try to avoid the obligation of paying a huge amount of damages and therefore they would most probably instruct their employees to give the money to the robber especially when the robber has hostages in his hand.

As a result of this, the probability of bank robberies that involves hostages will most likely increase. Why? Well, the robbers might not even know about the decision, but they can learn from the banks behavior. When they realize that having hostages in their hand increase their robbery success, they would quickly understand that having hostages is beneficial and therefore the use of hostages will increase naturally. Through this perspective, we learn that the effect of consenting the payment of damages to the heirs might be harmful to the society. Yes, from fairness point of view, it might not be fair for the heirs that the bank is not deemed liable for the death of the hostage, but for the sake of greater purpose, the court must make the right decision.

Of course, other argument can be made in different conditions. An an example, suppose that it can be proofed in the court that the robbery occurred because the bank did not maintain a reasonable security force within the bank's office. Using the Ex Ante Perspective, the court should grant the payment of damages to the heirs on the basis of the bank's negligence to provide sufficient security force. What is the expectation here? The decision might provide an incentive to other banks who have less security force to actually increase such force in order to avoid the obligation of paying the damages. As a result of such increase, logically, the rate of robbery should go down as bank robberies become harder.

Notice from both cases that although the results are different on who win the case, the intended effect is similar, i.e. preventing more crimes that will harm the public. And yes, the arguments that serve as the foundation of the decision must also be clear since it will definitely affect the incentives that the decision will create to the relevant parties.

In my view, Ex Ante Perspective is very useful in drafting laws, regulations, and other public policies. We might not always know the actual effect of a law to the society, but, we must always remember that the law will definitely affect the society, even if it is only a little. Only by understanding this fact that legal drafter and judges will be more responsible in "creating" the law.

For further reading material on this issue, I would suggest you to read The Legal Analyst by Prof. Ward Farnsworth. This is a good book for law students and lawyers who wish to develop their analytical skill to the next level. See you in other Legal Analysis Tool Kit Series.

On DPR and KPK Chief Candidates (Indonesian Version)

Here is another post in Indonesian language on why the Indonesian Legislative (DPR) cannot reject the two candidates for Chief of the Indonesian Anti Corruption Commission (KPK). I must admit, writing in Indonesian language is a lot easier, far, far easier than writing here in English :p.

Morality Defined At Last?

So the Playboy case has been decided by the Supreme Court and its former Editor in Chief will serve 2 years in prison. If you ask me, I don't have any concern with the fact that FPI was the one who reported the Indonesian Playboy magazine to the police. Anyone can do that, including myself. What really concerns me is the considerations of our judges and prosecutors in handling this case, especially with respect to the definition of morality and the acts that can be deemed as against such morality.

Further comments will be made after I receive and read the decision. Stay tune.

On Corruption, Prison, and Alternative Sanctions (Indonesian version)

You can read my post here on why we need to find better alternative sanctions in fighting corruption. Prison is overrated.

Gridlock Economy: When Too Much Ownership Kills the Market (Part 2)

In the first part of my post, we have discussed the difference between the Common and Anticommon Tragedy and also some examples that may be familiar to all of us. In reality, gridlock exists and it causes major problem to the society. So the one million dollar question is: "what can we do to solve the issue?"

Step 1: Identifying Gridlocks
Certain actions can be done, but first thing first, we need to identify those gridlocks before we can solve it. Gridlock is a waste to the society simply because it causes resources to be underused. What really troubles me is the fact that gridlock is mostly hidden. Have we ever thought that the cure of cancer might be already in front of our eyes today if not because of the fight between companies having small patents over genetic samples? Or do we realize how much our economy suffers because of there are too many robber barons along the road to investment, i.e. the regulators? In most cases, the Anticommon Tragedy is a pure human tragedy made by the one and only, men.

To be honest, I am not surprised that most of us are not aware of the gridlock. Try typing Anticommon and you will see a red underline below the world. Yes, even our beloved Blogspot hasn't recognized this word. Or try the word "underuse", and you will definitely find another red underline. How can we spot these issues if our sophisticated computer doesn't even have the terms stored in its thesaurus? So, let us try to familiarize ourselves with these terms, try to understand that there is a possibility that our important resources are being underused and therefore do not produce the maximum benefit to our society.

Learning from other societies, cultures and countries might also be helpful in identifying gridlocks. You know the old saying "the grass of our neighbors always looks greener." In certain cases, the grasses are indeed greener. Learn the best from them, and ask why the same thing does not happen here? Why resources are being allocated more efficiently in some part of the world and not in other parts? Simple but true, isn't it?

Step 2: Unlocking the Grid

To unlock the grid, Heller provide 3 basic tool kits that can be used: prevention, treatment, and alternative medicine.

Prevention

Prevention involves monitoring and isolation of gridlocks. Monitoring means that we spread the information on such gridlocks to the public and the relevant authorities that might help to unlock the grid. It seems trivial but it holds a very important position, as there would be no use to identify the gridlock without having no one to tell anything about it. A good example of this monitoring is the gene patent issue. By informing the regulator on the difficulties made by so many small patents, the US regulators raised the standards for obtaining such patents with a hope that it can reduce useless small claims that prohibit development in producing the cancer cure.

Isolation of gridlocks is useful when the gridlocks have occurred already. In this case, we need to prevent the gridlocks from getting bigger while trying to find the right treatment. A good example: suppose the government issues a type of permit that causes certain natural resources to be underused by the people (say, the government issues too many permits). After identifying the gridlock, the government can isolate the problem by locking the issuance of any new permit.

Treatment

Treatment involves: (i) tune up existing laws, (ii) create assembly tools, (iii) get the label rights, and (iv) pick-up sticks. The first treatment basically deals with changing the laws to battle the gridlock. The problem with this method is that it may cause drastic changes to the society. We can go back to the patent issues as an example. We know that patent is needed to give incentives to business people to create and protect their ideas in order to gain benefit. But, we also know when there are too many patents for, gridlock may occur. To solve the issue, a radical change to the law may be needed, but reforming the law will need the agreement from all stakeholders and like or not, some deals will need to be made between the stakeholders and the law maker.

The second treatment deals with pooling rights together. Since gridlock is caused by too much fragmented ownership, pooling the rights to lesser parties seems a very good idea, such as via merger and common ownership. Of course this must be supported by the law in order to prevent the tyranny by the minorities so the gridlocks can be solved through mutual agreements.

The third treatment basically means that in order to make people aware about gridlocks, it is necessary to label the issues properly. A good example is the use of the "antitrust" term. Heller suggests that the term should be changed into "competition", because in his view, the "antitrust" term creates an idea to the society that monopoly and merger are always bad for social welfare In fact, there are cases where monopoly and merger are necessary to prevent resources from being underused.

The last treatment involves coercion and should only be used when other methods are not workable. It is basically a solution where the government wipes the existing rights and start over. Of course this means that the government must provide just compensation to the people who lost their rights. As an example: with respect to the above case of too many permits issued by the government, it is possible that the government annul the entire issued permits and start over the process. Yes there would be losses here and that's why a thorough calculation must be made before this solution can be conducted.

Alternative Medicine

Lastly we have the alternative medicine that gossip, shame and reputation method voluntary agreement, and philanthropy. Gossip, shame and reputation method talks about the social control that we do on day to day basis, mouth-to-mouth information. In practice, this method may work effectively to solve the gridlock issue without too much intervention from the Government. Many people consider their reputation as a very important issue and therefore this will affect their decision on whether becoming part of the solution or the problem within the gridlocks.

Voluntary agreement is quite clear though may be difficult to attain in the first place. After all, it is because of gridlocks that parties are having difficulties to reach a mutual agreement. Nevertheless, we have seen some examples of the actual implementation of these voluntary agreements, such as copyright pool made by singer-songwriters through a single organization in order to license copyrighted music for public performances.

The last alternative method is philanthropy which is self-explanatory. We've seen some good examples like philanthropy organization that buys patents for pooling purposes in order to ensure that those patents would be useful for the public. As the costs might be very high, such work might only be done by the Government or philanthropy organization that do not think too much about profit.

Conclusion

To sum up, we understand that in contrast to the common "common tragedy", there also exists the "anti-common tragedy" which is caused by too much fragmented ownership, either in the form of resources, assets, or even authorities. In any way, gridlock is a waste to the society since it causes resources to be underused.

Certain solutions can be made to solve the gridlock, including identifying the gridlock, ensuring that the people and the relevant authorities are aware about the gridlocks, isolating the gridlock, revamping the laws, promoting assembly of rights, establishing the correct labels, starting over the distribution of rights, using gossips and private contracts, and lastly, promoting philanthropy. That's all for the Gridlock Economy. I hope this would be useful and most of the credits should go to Michael Heller for his innovative book.

Public Policy Making Principles (Indonesian version)

You can read my article on public policy making principles here. I have decided that this blog will be dedicated for English version articles, and all Indonesian version articles will be posted at Politikana or any other media as I see fit. No worries though, I will always update this blog whenever I post articles in other media.

Kind regards,

The Capitalist Lawyer

The Illusion of the Islamic State

I would like to tribute this article to the commemoration of Indonesia's 65th Independence Day. We've seen so many people who try to establish an Islamic state (including in Indonesia) and claim that this state shall be eternally blessed by God and will solve all humankind problems. Not only that this is a false hope, it is also a big blunder. The main question is: does Islam actually recognize a specific legal form of Islamic state? My quick answer would be no.

Islamic Political Leadership Succession: Lessons from the 4 Great Caliphs

Before we discuss the evolution of Islamic state throughout the history, let us first see how political leadership was formed and passed during the early era of Islam. When the Prophet Muhammad SAW was still alive, he had two authority within his hands, i.e. religion and politic. However, neither the Koran nor the Prophet ever stipulate any specific form of state to begin with. In any case, it was an informal form of leadership.

When the Prophet died, a huge debate occurred between his devoted followers ("Sahabat") on who will replace the Prophet's position as the leader of the people of Makkah and Madinah. If there is actually a clear concept of leadership and state in Islam, surely such debate would never happen, but as further recorded in various history books, the debate was so fierce that the Prophet's burial process was delayed for around 3 days. Without a doubt, this was the first political crisis in the moslem history. Many issues were discussed in that debate as people were trying to find the most suitable candidate, including ethnicity, seniority, and also capability of the candidates. You may wish to consider the fact that at that time, tribal issues were quite dominant, and there was a huge risk that our young Islamic community would be shattered due to this leadership succession. Miraculously, the community survived its first political trial.

When the debate was finally over, the Sahabats who attended the meeting agreed that the first person who converted into Islam, Abu Bakar, should become their first leader, the first caliph of the Islamic society. They also agreed that only political leadership which shall be passed to Abu Bakar, while religious leadership was deemed over with the death of the Prophet. After all, no one would be able to receive directly the wisdom of God other than the Prophet. Abu Bakar led the Islamic community for about 2.5 years. After he died, Umar bin Khatab became the next caliph through a direct appointment from Abu Bakar. Some prominent moslem historians claim that Abu Bakar has discussed Umar's appointment with other respectable Sahabats, and all of them agreed with his appointment. Nevertheless, it was Abu Bakar who directly appointed Umar as his successor. So by now, we could see 2 types of leadership succession. Later on, Ustman bin Affan became the successor of Umar. How did it go?

Umar appointed 6 members from the Sahabats (the "Council") with the task to elect the next caliph from the Council's own members. Again, another form of leadership succession. In my opinion, Umar was a great leader and he clearly understood that without any clear guidance, Abu Bakar's decision to directly appoint him would be considered as a binding precedent by the Islamic community if he also did the same in appointing his successor. Since he actually opposed the direct appointment mechanism, he decided to create a new mechanism for leadership succession. Then came Ali bin Abu Thalib as the 4th caliph.

After the death of Ustman due to a coup, Ali was elected as the new caliph through a direct election by the whole people of Madinah, and therefore became the first and also the last caliph who was appointed through a public election. The elections of Ali is a strong evidence that the early Islamic community practiced democracy, though maybe not as complex as today. Despite the inconsistencies in leadership succession mechanism, there is a general rule that we can learn from the above story. All of the 4 caliphs were considered as capable and respected leaders, and none of them were appointed because of family relationship with the previous ones. For such a young community with deep tribal issues, this was a great achievement indeed.

Unfortunately, this great system ended when Muawiyah bin Abu Sufyan gained the title of caliph. I'll reserve the story on how he got that title for another post (maybe when we discuss the Shia political movement), though I can say it here that it is a controversial one, and many historians are still disputing whether Muawiyah had valid grounds to obtain that title from Ali bin Abu Thalib. How did Muawiyah end the caliphate system of leadership succession? He appointed his own son, Yazid, as his successor, and by such act, he turned the caliphate into an ordinary kingdom. Yes, the Islamic people are still calling their leaders as caliphs, but they are not different from kings who gained their title simply because of family relationship.

The Evolution of Islamic State: Experience or Religious Doctrine?

Based on the above story, we can safely conclude that in terms of political leadership succession, the early Islamic community did not have a single established system. Furthermore, the mechanics existing at that time were not simply derived from Godly sources, rather they were created from trials and errors, the experiences of the caliphs and the moslem community as a whole. This is how the concept of Islamic state evolves within more than 1,400 years, experiences rule.

Under Abu Bakar's leadership, the Islamic community was still very small, and Abu Bakar spent most of his time fighting insurgents, mostly lead by fake prophets who tried to gain control over the moslem community. Thus, you won't find complex state organs under his era as his government mostly resembled tribal leadership. The only thing that may be considered as an evidence of modern state is the existence of baitul-mal, or the state's treasury, though at that time it mostly dealt with war's booty. Nevertheless, it is still a unique concept, as the war's booty is considered as people's assets and managed by the "state" through the baitul-mal It was actually under Umar bin Khatab leadership when Islamic community started to grow into a more formal state. During Umar's period, the Islamic community expanded their power aggressively and they succeeded in controlling many new areas. As more and more areas fell under the control of the moslem community, Umar realized that he was no longer able to directly supervise those areas. As a direct consequence, there is a necessity to appoint representatives of the caliph to lead and supervise those new areas, and suddenly, we have governors position.

Soon enough, official judges position were also available as the new community need professional lawyers to settle their disputes and uphold the law. In short, Umar fully understood his role as a caliph, administering the government, managing the needs of the people, and establishing a good foundation for a powerful state. He also believed that the caliph position is a political and administrative position. In other words, there's nothing holy about it.

Sadly, as the caliphate turned into a kingdom, the nature of the caliph's position was also changed. In order to secure the caliphs' power, new doctrines were formulated, they were seen as the representatives of God, their authorities over the people were granted by God. Some prominent scholars rejected this notion, and claimed that this is not the ideal form of Islamic leadership. I share the same view, but then again, it is a logic decision from the caliphs. When you are no longer elected by the people, you absolutely need a good doctrine to support your power, and what would be better than using God's name? These caliphs were not stupid, some of them were also good lawyers and soon they established caliphate's official scholars with the task to formalize the doctrine, changing the status of the caliphate from a mere administrative body of government into a holy state. It should be noted that in those eras, many scholars did not want to cooperate with the caliphs. Those who were willing to cooperate with the caliphate will not be respected as they will be considered as people who sold their soul to the devil.

The Illusion and Its Grave Consequences

For the sake of fairness, I won't say that the concept of Islamic kingdom is entirely bad, in fact the caliphate had their good moments in the history of mankind. But the damage has been done, this whole business creates an illusion to the Moslem community that the Islamic state, the caliphate, is a product of God, part of the religion, instead of a product derived from political experiences. There are some grave consequences when the caliphate is deemed as a part of religious doctrine, and we can easily spot one, i.e. the fact that most people who wish to establish an Islamic state focus most of their time in defining the characteristics of the Islamic state instead of how the state can be useful for its people.

In Umar's era, he did not bother the formal structure of the state, what bothered him the most was his people's prosperity. Another major problem is that this illusion also creates a false hope to many people. From historical perspective, the existence of the Islamic state does not automatically solve all problems. The history is very clear on this subject and it would be a huge lie if Abu Bakar, Umar, Ustman and Ali did not face critical and complex problems during their respective leadership. In some cases, they were successful, in other cases, they faced failures. However, some people buy the lies and completely believe that the establishment of the caliphate will solve all problems. I can only hope that this people could face the cruel reality someday.

Conclusion

We have reached an understanding that the concept of Islamic state is mostly derived from experience not religious doctrine. As a consequence, there is no use for discussing the formal structure of the Islamic state. Don't waste our time preaching the greatness of the Islamic state and the promise that it will bring, instead, we should really focus on how we can manage the state to provide better service to the people, and I am certain that this is relevant for the current Indonesia. Hope it's useful :) Happy Independence Day my beloved Indonesia!

No Post for This Week

Due to my accident in Bali last Saturday, there will be no post for this week, and thus the second part of the Gridlock Economy will also be postponed.

Kind regards,

The Capitalist Lawyer

Happy First Anniversary!

Wow, today is already the official first anniversary of my blog! To commemorate this day, I decide to start writing again (see my post on Gridlock Economy, 2 August 2010). Hopefully, I can maintain my consistency this time. If you ask me where the hell was I for the last 8 months, I can only say, "blame Twitter!" Okay, I admit it, it's a lousy reason :p. Anyway, apart from that lousy reason, the fact is, too much tweeting has caused a real blow to my ability to write fluently in this blog and yes, I think this is the right time to put and end to that. I won't say that tweeting is bad. It's good and I've gained so many ideas from the Twitverse. However, as told by many people, most of those ideas need better elaboration, and what fits better to achieve that purpose other than a blog? So stay tune with the Capitalist Lawyer and for all of you who have visited this blog during my absence, a big thanks from me :)

Gridlock Economy: When Too Much Ownership Kills the Market (Part 1)

I am always happy to find new enlightening ideas, and I found them recently in a book titled "The Gridlock Economy: How Too Much Ownership Wrecks Markets, Stops Innovation, and Costs Lives." This book made by Michael Heller, a Law Professor from Columbia Law School, introduces the concept of the tragedy of the anticommons, i.e. a condition where due to over fragmented ownership of a resource (i.e. ownership of a single resource is distributed within too many owners), such resource is highly underused to the extent that it cannot provide any benefits to its owners nor the society. It is the opposite of the tragedy of the commons ("Common Tragedy") where a resource is overused to near extinction because no one have ownership over such resource and therefore no one cares about the sustainability of such resource.

In Part 1 of this Article, we will discuss the basic concepts of the Common Tragedy and the Anticommon Tragedy. Later in Part 2, we will discuss further issues related to Anticommon Tragedy and the proposed solution to solve such issues.

A. The Common Tragedy: What and Why?

First thing first, the concept of Common Tragedy is made on a solid logical foundation. Imagine if the human race never acknowledges the concept of ownership and therefore each and every man can use any resources that are visible, accessible, and usable to him. What will happen? Logically, everyone will try to exhaust such resources as soon as possible for fear of being preceded by others. There will be no incentive to conserve the resources in this case, simply because each person doesn't know whether other people will do the same. Why bother conserving if there is no mechanism to prevent other people to take the parts that are being conserved by you? As simple as that.

A simple example to this Common Tragedy is the crisis in tuna's supply. The fact that there is no clear licensing for fishing the tunas in the open seas has caused the tunas to be over-fished by the fishermen. As there is no one to supervise such fishing activities, those fishermen simply exhausted the tunas to near extinction level. Can we stop this crisis by simply stop eating tunas? Am not sure if that will be an effective solution. So what's the proper solution for this?

B. Solution for The Common Tragedy: Private Ownership

Yes, the best solution for the Common Tragedy is actually private ownership. Forget the utopian world of Karl Marx! If that utopian world could ever exist in this world, our overall life would be worse than ever.

In general, private ownership provides the best incentive to people to protect valuable resources. After all, each person will do his best to protect his own interest and will not let other people take his rights easily. Let me give you a simple example. Suppose you purchase a land in a city. Soon after you secure all necessary legal documents, you will most probably put fences and maybe even guards to protect the land from illegal trespassers. You will not let unknown people to try using the land for their own benefit. In short, you think for the best interest of yourself, and by doing so you also protect the economic value of such land.

In this case, what would be the role of the state? The state may act as a guardian, a night watcher who will ensure that each man will play in accordance with the rule of the game.

C. Understanding The Anticommon Tragedy

However, while private ownership may be the best solution for preserving resources, it doesn't mean that this solution is perfect. The problem comes when there is too much ownership over a single resource. As I said before, each owner will act to his best interest and will try to maximize his benefit from his part of ownership in such resource. What would happen then? Each owner will most likely block the other owners from using the resource to ensure that they can get the maximum benefit. Sure, they can talk among themselves and reach a mutual understanding on the management of the resource, but what if the number of the owners is very big, so big that the transaction costs of doing good faith negotiations would be too expensive? Here comes the Anticommon Tragedy.

One of the most interesting examples of Anticommon Tragedy is the problem faced by the pharmaceutical industry. I am very sad to know that the cures of some major sicknesses, such as AIDS and cancer, have not been invented yet not because our inventors are too stupid to create them, but because of a very serious dispute on intellectual property rights. There are so many patents for each individual element that is needed to make a cure and each patent holder blocks the cure inventor to use such patent without paying a very high price. As a result, the company feels that pursuing such cure becomes not viable and stop its effort to make one. In this case, the society as a whole becomes the main victim.

Or let us see another simple example regarding a plot of land. Suppose that you enter into an agreement to purchase a land from an old landlord. However, just when you're about to close the transaction, he died suddenly. Apparently the landlord was a millionaire and had lots and lots of heirs, and you know what, that plot of land quickly falls into a dispute between heirs. In this case, you'll be trapped spending a lot of time to negotiate with each heir, finding the right price to satisfy each of them. You might end up getting nothing from this condition as you will realize it is almost impossible to satisfy all of them. In Ronald Coase's theory, the transaction costs are just too huge to follow up the transaction.

Gridlock can also occur in regulatory agencies, that is when there are too many regulators to deal with. One major example would be our beloved country Indonesia. When an investor try to invest in Indonesia, it must deal with many authorities, each having their own jurisdiction and don't even think to see any slight evidence of good coordination between them . This situation create a high cost economy to investors. Not only that they are being confused with the number of authorities, each authority may block the license necessary to conduct the investment. Imagine if you have secured all necessary licenses, all but one, and then you realize that your whole investment fails due to that one particular problem. This type of gridlock is truly a dangerous one.

Looking at the examples above, I am sure that you will consider the Anticommon Tragedy as a very interesting issue. Now, what can we do to solve this issue? Stay tune in the second part of this post :).