06 June 2008

Giving subsidies will not cure high prices for food and oil, and neither will a "dynamic economy" as MM Lee indicated. Will more money alone solve our problems? Will more paper dollars guarantee that we can continue to buy food at market prices as MM Lee suggested? Will Vietnam and Thailand sell any rice to us if they have a poor harvest? Can money buy you food that is not available? Can money buy what is not for sale? Instead of a "dynamic economy", we ought to be thinking of how to increase local food production so that we can be more self-sufficient.

MM Lee Kuan Yew is holding on to a fundamental error held by conventional economists:

Error: Economic activity as a function of infinite "money creation", rather than a function of finite "energy stocks" and finite "energy flows". In fact, the economy is 100% dependent on available energy -- it always has been, and it always will be.

Economic students are taught that banks "create" money every time they make a loan, and that the economy is powered by money instead of energy. The juxtaposition of these two data (the first is true, the second is false) leads even Nobel Prize-winning economists to conclude they have discovered a perpetual-motion machine:

"Should we be taking steps to limit the use of these most precious stocks of society's capital so that they will still be available for our grandchildren? . Economists ask, Would future generations benefit more from larger stocks of natural capital such as oil, gas, and coal or from more produced capital such as additional scientists, better laboratories, and libraries linked together by information superhighways? ... in the long run, oil and gas are not essential." [ p. 328, ECONOMICS, Nobel Laureate Paul Samuelson and William Nordhaus; McGraw-Hill, 1998; http://www.amazon.com/exec/obidos/ASIN/0070579474/brainfood.a ]

No person has had a greater influence on the thinking of experts who have become government regulators of the world's oil and gas industries than economist Morris Adelman: "There are plenty of fossil fuels and no limit to potential electrical capacity. It is all a matter of money." [ p. 483, THE ECONOMICS OF PETROLEUM SUPPLY, by M. A. Adelman; MIT, 1993; http://www.amazon.com/exec/obidos/ASIN/0262011387/brainfood.a ]

But of course, economists like Samuelson, Nordhaus, and Adelman are wrong. The First and Second Laws of thermodynamics tells us there is a limit to potential electrical capacity -- it's not all a matter of "money", it's all a matter of "energy".

The money supply is not constrained by the laws of matter-energy (ecosystem/biosphere) within which our economy must operate. When the physical constraints of our production are reached, the disparity between our monetary and physical system will manifest itself as price inflation, which is what we are witnessing today.

It is lamentable that our leaders do not recognize the errors of the conventional economic system, which explains why I will continue to be pessimistic about our future until there is a fundamental shift in their worldview. They are still trapped in their old mindsets and change will not come easily as they were taught and trained to think "economically" instead of "thermodynamically". Modern economics is not based on scientific laws.
MM Lee: Because with a good currency, 'however much the price of rice goes up, or meat, or whatever, we will not go hungry'.
Modern industrial agriculture is highly dependent on high energy inputs. When oil production begins its irreversible decline, large-scale agricultural outputs will follow suit. In view of the recent news that several countries have curb their grain exports, do you think food exporting nations will sell any food to us if they are unable to satisfy their citizens' stomachs?

The keywords to our future survival are "self-sufficiency" and "redundancy". It may not be economical to produce our own food and to ramp up solar energy production now, but these steps will increase our resilience in times of food and oil disruptions which look increasingly likely each passing day. Unfortunately, redundancy is often at odds with economic efficiency - a "sacred cow" in the Singapore context. When it comes to food and energy production, being "economical" and "efficient" increase our vulnerability to external shocks.

MM Lee's typical "money-will-solve-all problems" thinking is best summed up by Richard Heinberg who was writing hypothetically from the future:
The economists had been operating on the basis of their own religion - an absolute, unshakable faith in the Market-as-God and in supply-and-demand. They figured that if oil started to run out, the price would rise, offering incentives for research into alternatives. But the economists never bothered to think this through. If they had, they would have realized that the revamping of society's entire energy infrastructure would take decades, while the price signal from resource shortages would come at the exact moment some hypothetical replacement would be needed. Moreover, they should have realized that there was no substitute capable of fully replacing the energy resources they had come to rely on.

The economists could think only in terms of money; basic necessities like water and energy only showed up in their calculations in terms of dollar cost, which made them functionally interchangeable with everything else that could be priced -- oranges, airliners, diamonds, baseball cards, whatever. But, in the last analysis, basic resources weren't interchangeable with other economic goods at all: you couldn't drink baseball cards, no matter how big or valuable your collection, once the water ran out. Nor could you eat dollars, if nobody had food to sell. And so, after a certain point, people started to lose faith in their money. And as they did, they realized that faith had been the only thing that made money worth anything in the first place. Currencies just collapsed, first in one country, then in another. There was inflation, deflation, barter, and thievery of every imaginable kind as matters sorted themselves out.

In the era when I was born, commentators used to liken the global economy to a casino. A few folks were making trillions of dollars, euros, and yen trading in currencies, companies, and commodity futures. None of these people were actually doing anything useful; they were just laying down their bets and, in many cases, raking in colossal winnings. If you followed the economic chain, you'd see that all of that money was coming out of ordinary people's pockets...but that's another story. Anyway: all of that economic activity depended on energy, on global transportation and communication, and on faith in the currencies. Early in the 21st century, the global casino went bust. Gradually, a new metaphor became operational. We went from global casino to village flea market.

With less energy available each year, and with unstable currencies plaguing transactions, manufacturing and transportation shrank in scale. It didn't matter how little Nike paid its workers in Indonesia: once shipping became prohibitively expensive, profits from the globalization of its operations vanished. But Nike couldn't just start up factories back in the States again; all of those factories had been closed decades earlier. The same with all the other clothing manufacturers, electronics manufacturers, and so on. All of that local manufacturing infrastructure had been destroyed to make way for globalization, for cheaper goods, for bigger corporate profits. And now, to recreate that infrastructure would require a huge financial and energy investment ---- just when money and energy were in ever shorter supply. (Peak Everything, pp. 175-177)

OIL and food prices are at record highs and look set to stay that way.

At the same time, there are Singaporeans who want subsidies for a range of items, from rice to bus fares.

But Minister Mentor Lee Kuan Yew made clear yesterday that subsidies are no way to solve problems caused by rising costs.

He argued that subsidies reduced the incentive for people to be competitive - which is what is needed to keep the economy growing in order to better pay for costlier essential items:

'As long as we have a dynamic economy, we can solve our problems. Subsidies cannot solve them.

'I read the newspapers and the simplest thing is to write and say, subsidise. Rice, oil, bus fares, even putting seat belts on school buses. That is the surest way to go downhill.

'Multiple subsidies have led to a welfare system that has trapped Europe in slow growth. Europe's welfare systems have lowered incentives for people to strive and to excel.'

Speaking to 6,000 constituents at the Tanjong Pagar GRC Family Day at the Queenstown Stadium, he dwelt on why the problem of rising costs is here to stay and how Singapore plans to deal with it.

He noted that the consumption of oil had risen, with few new oil discoveries. And as once-poor countries like China and India prospered, they needed fuel to make goods to export.

The world's population, now over six billion, is forecast to hit nine billion by 2050. But climate change is drying up agricultural areas.

'What are we going to do? We can see the signals,' he said.

'We can't grow tapioca, or corn; we can't compete in making Nike shoes or sewing gowns. We have to move up to more complicated jobs and services.

'We have to earn enough money by working hard and smart in manufacturing and services to pay market prices for food, rice, wheat, maize, vegetables, fruits, fish, meats, chicken and eggs.'

Because with a good currency, 'however much the price of rice goes up, or meat, or whatever, we will not go hungry'.

Singapore had to remain a competitive society to generate growth.

'The Government must ensure that everyone has the highest-paid job he is qualified to do. If his salary is below the minimum for a decent life, the Government will top up with Workfare,' he said, referring to the national income supplement for low-wage workers.

And if people know the cost of what they consume or use, they will spend their money 'more to (their) benefit', he said, instead of over-using or abusing subsidised items which they did not know the real cost of.

Mr Lee said neighbouring countries now had to grapple with the economically-necessary task of cutting fuel subsidies. In Indonesia, for example, there were riots.

But he noted that opposition leaders there also encouraged demonstrations over the cuts and rising food prices to weaken the chances of President Susilo Bambang Yudhoyono winning re-election next year.

'In Malaysia, determined efforts by former PM Mahathir to unseat PM Abdullah Badawi have not weakened his (Abdullah's) hold on the reins of power because he commands a decisive majority in Parliament, just short of two-thirds,' he added.

'But not to upset the electorate, his government has not reduced the subsidy on oil.

'Of our other neighbours, Thailand faces the danger of another coup. In the Philippines, charges of corruption hover over President Gloria Arroyo, damaging for investors and the economy.'

Citing recent natural disasters in Myanmar, he said Singapore had 'no earthquakes, no tsunamis, no typhoons because of our favourable geographic location'.

'Let us be grateful that we have long-term stability and therefore continuing high-value investments and good growth,' he said.

'In five years, we will have a more lively and beautiful city.'

He was also confident that other big cities in Asean - Bangkok, Kuala Lumpur, Jakarta, Manila, Ho Chi Minh and Hanoi - would flourish with the advent of the Asean free trade area and other free trade pacts.

MM Lee then apologised to the audience for not being able to speak too long last night, as he had a 'bad throat' and is scheduled to take the stand in court today.

The hearing is to assess damages that Singapore Democratic Party chief Chee Soon Juan, his sister and the party have to pay for defaming Mr Lee and Prime Minister Lee Hsien Loong in 2006.

'I've got to save part of my voice to let him cross-examine me,' Mr Lee said. 'Of course, in the course of the cross-examination, I have a few things to say.'