Biofuels-- Agrofuels. Whats in a name?

Today, I thought I would enter the biofuels debate. After all, every Tom, Dick and Harry wants to enter the debate. So why not Balasubramanian?
Biofuels are the common name given to anything that provides energy that comes from agricultural sources. This could be ethanol, power produced from bagasse, jatropha seed juice, even methane from cowdung.
So why is everyone interested in it now though? After all, these things have been around since the dawn of time, practically. Heck, I remember watching programs on biogas when I was a kid, and Doordarshan was the only Channel available!
Well, the answer is simple. 10 years ago, a barrel of crude oil used to cost $12-14. Today, it is about $76. Economics says that if prices go up, demand for the product goes down. But Oil is a strange commodity. Like food, the modern world cant seem to live without it. Thus, a situation in economics called inelastic demand sets in, where demand is somewhat independent of price. But even though the demand stays constant, now there is a desire for substitute sources. And this is where biofuels comes in.
Burning Ethanol in the car engine has been around since Gerald Ford made the first Model T. After all, it was a car designed to run on alcohol. But who would like to go through the lengthy process of growing a crop, and then waiting for it to grow, and finally produce alcohol fuel, when you get high grade petroleum oil practically coming out of the ground for free! So alcohol was abandoned. But when oil hit $50 a barrel, the interest was rekindled. After all, the cost of sugarcane is not too much, and alcohol could now be substituted. And besides, after all the hoopla about green energy and global warming, producers can get labelled as good guys even while they rake in the money!
But can there ever be a perfect deal? Unfortunately no! What you gain on the swings, you lose on the roundabouts. Ethanol is produced from three major crops; sugarcane, corn and sugar beet. But sugarcane requires fertile and irrigated land. And even if we take the entire cropland in the world and grow sugarcane on it, we probably would not be making enough ethanol to supply our needs. At best, ethanol is a partial substitute. Also, the diversion of land from food crops to sugarcane leads to a situation where food prices will become a serious problem. This is especially because the crop is grown in countries which are not precisely rich; Brazil, India, Africa, and the likes.
So the lobby against biofuels is slowly building itself up. But this is a debate that will probably be decided by the Financial officers and the bean counters at an office rather than in the streets and farms. But the end result may well be seen in the economics classrooms when people discuss case studies on substitute products!

The following is from a blogger named Ronald Brak. If you wish to read his actual post, please go to his webpage....I have taken this verbatim from there, so do read him here. He is quite simply great!


When I was in Melbourne last week and riding in one of those electric conveyances they call a train, I saw a sign painted on the side of a factory building that said, “Buy your kids a job: Buy Australian.”

I wonder how this would work? If everybody in Australia only bought Australian products then everyone who produces exports would be out of a job. This is because you can’t export without importing and if everyone only buys Australian no one will buy imported goods. Unless of course the people who want us to buy Australian expect the export industries to just give away their production to other countries for free? My, if that’s the case, how generous they are with other people’s money. But it might be a bit hard to convince those workers it’s a good idea. “I’m sorry, but as Australia no longer imports anything and this mine only produces coal for export it’s not possible to actually receive payment for it anymore, so the wages of all you miners will have to be reduced to zero. In addition, since there is no income to purchase fuel we will soon be reduced to digging coal by hand. On the bright side, the Japanese will be very grateful. Now stop standing around and get to work!” No wonder so many people support weaker unions.

If buying overseas products is so bad it’s a wonder we didn’t ban it ages ago. In fact Australia made strong moves in that direction during the great depression. This was so successful that Australia soon became an economic powerhouse and entered the period known as the roaring thirties. Any stories you’ve heard about hardship at this time, or indeed swagmen, are lies spread by the black armband type of historian.

I have heard people say, “It’s better for the money to stay in Australia!” But I wonder why that is? Does the money get scared when it leaves its home country? If it were better for the money to stay in Australia, wouldn’t it be even better if the money stayed in its own state? Or perhaps even its own town? Wouldn’t it be best of all if the money never left the pocket of the person who owned it? Just think how rich we’d all be if no one ever bought anything!

But Australian money always comes back to Australia. It has to. It’s like magic. Let’s say some filthy foreigners, in an attempt to hurt Australia’s economy, take a heap of Australian notes and burn them while dancing and gloating around the rather stinky bonfire. Well, all that money value would return to Australia, as the treasury would print up a new batch of notes as soon as it noticed there weren’t enough in circulation, magically creating money out of nothing!

Okay, you say, so filthy foreigners burning or eating Australian notes won’t result in money not coming back to Australia, but surely buying filthy foreign products made by filthy foreigners, or even clean ones, must be bad?

No. Not at all. To explain, let’s say you want to buy a toilet brush. To keep things simple will assume that all transactions are in cash and that there are no banks or other institutions that exchange money.

Let’s say that down at the shop you have a choice between two toilet brushes of equal quality. An expensive one made in Australia and a cheap one made in China. Now you might think that if you bought the more expensive Australian one, you’d be helping an Australian company. Well you’d be right, but you’d also be hurting an Australian, yourself. It costs you money to buy the more expensive product. If that’s what you want to do, fine, go for it. But it might be more efficient to buy cheaper foreign goods and then just give the money you save to Australian companies as a gift.

But what happens if you buy the cheaper Chinese toilet brush? Won’t the money go out of the country? Well, yeah, it’ll go to China. But it won’t stay there. Somewhere in China there will be some toilet brush factory owner with a stack of Australian money. What’s he going to do with it? Australian dollars aren’t much use to him. He can’t go down to the corner store and buy a bowl of noodles with them. He needs Chinese currency for that. All his employees expect to be paid in Chinese money too and so do the suppliers he buys plastic stock and bristles from. Unless he wants to go on vacation in Australia and spend it himself he’ll have to swap it for Chinese money.

But who in China would want Australian money? What good is it in China? Well it is useful for buying things from Australia. For example, the local meat distributor might be interested in buying some Australian beef. The power company might want some Australian coal. The noodle factory might want Australian wheat. All our toilet brush businessman has to do is call up these companies and find out which one will give him the best deal on Chinese currency in return for his Australian dollars and then the Australian dollars will return to their home country as they are used to pay for Australian products. Hey presto, no money leaves the country for long.

Using checks or electronic money transfers don’t change this situation at all. Nor do the existence of banks that act as middlemen for exchanging money. So buying goods from overseas isn’t somehow bad for the economy.

But wait a minute! What about Australian companies that are going to the wall because of overseas competition? If the Australian toilet brush company goes out of business won’t Australian workers lose their jobs? Shouldn’t we help the owners of these companies? Well no, we shouldn’t. We should help the workers, not the owners. If the owners want they can receive the same training/relocation/government work program that their former employees get. You see, business owners have a very important job and that is to make good business decisions. If we protect them from the results of bad business decisions, such as producing toilet brushes in Australia, then they haven’t got such a strong incentive to do their job well.

To repeat, this is not my post. All intellectual rights to it belong to Ronald Brak, found here!

More than just paper money?

This is necessarily short because this is still work in progress. In economics, we learnt that people hold money for 3 reasons.

1) 1. To buy things with it (transaction motive)

2) 2. As a safety net (precautionary motive)

3) 3. To invest or speculate, so as to make more money (speculative motive)

Now, what if something else is used for any of these purposes? I am not talking of the barter economy in failed economies. Instead, look at today’s world of commodities trading. Here, people are supposed to buy steel or cement or sugar for the purpose of using it. Instead, today, the market for commodities is clearly dominated by speculators. These are people who try to make money by speculating that the price will move up or down...buy the commodity contract, only to sell it later. Thus, they never usually accept delivery of the commodity itself...just buy and sell contracts.

I think a case can be made that these commodity contracts are a new form of money. They can be freely traded, they have a fixed value that does not change with time, and are convenient. However, most people recognize that paper money is worthless unless you can trade with it (exchange or buy things with it). This is not the case with commodity contracts, where there is a value attached to them, which is equivalent to the value of the commodity.

But this does not detract from the essential case. Today’s commodity markets are just another form of money being traded around. But we all know about inflation and money. How does that work in the commodity markets? And does it work at all? Its something I have not got an answer to yet...but it makes for an interesting case.

Economic Theory for crazies – Part I, Government as a Monopoly

One of the things that I find wonderful about economics is its applicability for the most amazing things. While on the train, I had little to do, except stare at the roof, or listen to the opinionated chap behind me pontificate. So I thought about government.

There are striking parallels between Microsoft and the government. Both of them cannot be challenged (At the moment). And almost everyone agrees that both of them are abusing their powers. Microsoft abuses its powers to make super profits, (while providing great products) and the government abuses its powers by giving us shoddy services (check the state of your roads for verification). Now, I merely use Microsoft because it is a convenient example, and everyone loves bashing Microsoft. But any monopoly could do. Now why is that?

Economics says that when a transaction takes place between a buyer and a seller, in the best case, both the buyer and the seller gain. For example, let us say I go out to buy potatoes (I like them...what can I say?). I would like to pay Rs. 10 for a kilo. At the same time, the friendly neighbourhood grocery store has got potatoes which he is willing to sell at a minimum price of Rs. 6. Now, the two of us meet, and then we bargain, and finally, I will walk away paying Rs. 8 for a kilo. Now I am happy, for I figure that I have saved Rs. 2. And my grocery guy is also happy, because he figures that he has gained Rs. 2 as well.

This 2 Rs gain that I as a consumer make is called the consumer surplus, and the Rs. 2 that the grocery guy got is called the producer surplus. And this works only because I could bargain with the man. Now, let us say that instead of having competition, there was only a single grocery owner in the city...and let us also say that he is a very intelligent shopowner, who is likely to know exactly how much I am willing to pay for my potatoes.

Now, I do not have a choice...if I need to buy potatoes, I will have to buy them from this man...And my shop owner is only interested in maximising his profit, which will be when he charges Rs. 10 for a kilo of potatoes. More than this, and I will go buy beans or something else. Less than this, and he could have made more from me! So, as can be seen, now the consumer surplus drops to Zero, and the producer surplus rises to Rs. 4. So, I am left unsatisfied, and my shop owner can earn super large profits.

Now, how does this relate to government? Government after all can be though of as a provider of services. And since there is only one government at any given place, what happens is that it is a classic case of monopoly. Let us take the example of policing. Since there is only one police force that is possible, and this police force is not really economically penalised for providing sub standard service, they will provide the poorest quality service that they can profitably get away with. If the law and order completely breaks down, then the police will probably be thrown out, so they ensure that that unfortunate situation does not arise. But they will not get more profits or better revenues if their service is better...after all we are a captive customer base. So they will not provide a quality of service that we would like. Instead, they will provide the minimum services that they can get away with.

So, an economic solution (to me) seems to be to bring in competition in the services that government operates. This ranges from basic services such as law and order, right up to the point of framing of laws. What does this mean? It means that the citizen should be allowed to choose the cocktail of laws that he/she will follow. These laws should be enforced by separate forces. Since each person will have different expectations of government, and how much he/she wishes to pay for it, several alternatives are likely to emerge. It would also mean that privacy campaigners can also be satisfied...just choose a set of laws that do not invade your privacy. Of course, certain services therefore will become unavailable to you, but that is market forces for you! What you gain on the swings, you lose on the roundabouts, but as it has already been proved above, our consumer surplus is zero at this current moment, so anything ought to be better!

So economic theory states that a functioning anarchy is possibly the most efficient form of government. Conversely, it now seems obvious that a completely despotic dictatorship is the most inefficient government for the citizens, although it is the best option for the people in power, as they can maximise their gains.

Sounds perfectly fine, neh?