Food? Fuel? Dilemma?
- From: "CKinSF <ck_in_sf1@xxxxxxxxxxx>" <CKinSF <ck_in_sf1@xxxxxxxxxxx>>
- Date: Mon, 19 May 2008 18:52:05 +0800
Food? Fuel? Dilemma?
If you read his blog, you will find out that many things interest HAFIZ NOOR
SHAMS. The environment, poetry, politics, and yes, economics. Some of you may
also know him as the guy who mounted a solo protest for peace during the recent
Olympic Torch Relay in Kuala Lumpur. He begins his weekly column with us today.
MAY 19 ? Not all dilemmas are really dilemmas. Open up the lid and upon closer
inspection, the dilemma unravels without much investment in effort. One such
apparent dilemma concerns the production of fuel and biofuel. There is no
dilemma between food and fuel however. Free price is the Gordian knot to end the
In explaining the current food crisis, the production of biofuel has been named
as one of the culprits which forced food prices to go up. Some sources typically
harvested for food are now being turned into fuel as a solution to high crude
oil prices and to some extent, as a solution to an environmental concern as
With all that, the food sector suddenly finds it?s competing with the fuel
production industry for supply; cross-elasticity of demand ensures that.
Cross-elasticity is basically a fancy way in economics of saying changes in
prices of one item affect the quantity demanded for another item. This happens
when a product could substitute another dearer item. Coming back on track, as
crude oil prices continue to rise, so too demand for alternative fuel. In this
case, it is biofuel.
Price is essentially a signal of scarcity. Price reflects all available
information about the associated good. In a market free of state intervention,
all market participants will face prices that reflect the true situation in the
With free prices, market participants including producers will base their
decisions on the true market situation. Within the context of food and fuel
production, when there is relative scarcity of one item to another, production
of the scarcer item will see an increase.
In the end, there will be a dynamic equilibrium between food and biofuel
production closely matched to the reality on the ground. Development and
application of supply chain technology may potentially somewhat stabilise the
dynamics by reducing lags that exist between implementation of policies and its
results but I am not convinced this can totally eliminate the fluctuation
typical in most market and much less business cycles.
With deeply statist policies in place, however, information about the reality on
the ground does not get relayed to market participants. Through subsidies,
prices floor and ceiling and other mechanisms set in place for purposes ranging
from welfare to environmental and development of new technology, prices are
Under statist policies, prices basically stop acting as a signal of scarcity. As
market participants, consumers and producers alike, choreograph their decisions
based on these flawed prices, their actions will not approximate the true
situation of the market.
The larger the effects of statist policies, the harder it is to estimate the
true situation of the market, setting the stage for a painful fall. An extreme
scenario would lead to a violent collapse of the state as the market would
eventually overwhelm the state.
To a statist and even more to a populist, the question of food and fuel
production is a dilemma. Price increases of food and crude oil require a hike of
production of food and biofuel. Yet, there is a trade-off of production between
the food and biofuel.
A statist in the end sits at his desk, trying to think which is more important
to the society or in most cases, to the stability of the state. He has to devise
a model, whatever the model may espouse, to decide on the matter.
An adherent of free market principles would deal with the question with an ease
that would insult any statist. The free market solution is simple: let the
market decide for itself.
Before that can happen, the prices have to be set free, especially from policies
which suffer deadweight losses. This includes most if not all of welfare-based
policies. As for policies on externalities and development of technology which
could push the supply curve outward, it should be judged on a case-by-case
basis. Let prices with true reflection of the market reach all market
participants without unnecessary friction.
Once the market is free, the dilemma will dissolve into oblivion and everybody
will eventually forget about it.
Mohd Hafiz Noor Shams is a young participant of the local labour market and he
blogs regularly about liberty at http://maddruid.com/
aka running dog chow-kow-sick-fûçkk(cksf)
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