Some of the Most Important Things to Know about Fish Economics

Lecture Prepared for theUnited Nations University Fisheries Training Program

Reykjavik, Iceland

Gunnar KnappProfessor of Economics

Institute of Social and Economic ResearchAnchorage, Alaska USA

Gunnar.Knapp@uaa.alaska.edu

January 2013

My goals for these lectures . . .

• To introduce you to – Economics and how economists think– Insights of economics about fisheries and the fish business– “Mainstream” economics

• This lecture focuses on the most important things to know about fish economics– General insights of economics that are relevant beyond fisheries– Not just “fisheries economics”

• Next two lectures will focus on:– Fish prices– Fisheries management systems

Economics matters!

• Economics offers important insights– Why fisheries and the fish business look the way we do– How we can derive more benefit from fish resources

• You don’t necessarily need to agree with economists—but you should understand what they do and how they think.

Economics matters!

• The “ideas of economists” drive the extent to which societies . . .– Are capitalist, socialist, or communist– Allow governments or markets to make key economic decisions– Promote or discourage trade – Adopt rights-based management in fisheries (such as quota

shares)

• How would you make these choices? Your answers reflect, in part, the ways you have been influenced by “ideas of economists”

“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else.”—John Maynard Keynes

Terminology

• Fish economics—any economics that has to do with fish or the fish business • The fish business—all industries that work with or depend on fish (fishing, aquaculture,

processing, transportation, fish stores, etc.)

• Distribution chain or value chain—the chain of businesses that own a fish from when it is caught till when it is eaten consumer (fishermen, processors, wholesalers, stores, etc.)

• Firms—Businesses (including fishing businesses)

• Goods: Physical things we consume or use (food, shoes, chairs, iPhones)

• Services: Non-physical things we consumer (education, movies, lawyers, boat repair)

• Inputs—things used to produce something– Labor (workers)– Capital (buildings and equipment)– Natural resources (water in the lakes, fish in the sea, trees in the forest, gold in the

earth)

• Resources: Anything we use to produce things or which we consume directly (goods, services, inputs)

1. The fundamental economic problem is scarcity.

• Something is “scarce” if there isn’t enough for everyone to have and use as much as they would like to have and use if they could get it for free.

• Not everything is scarce. Some things are “abundant”:– Air to breath– The beauty of the sunset and stars

• But most of what we use, produce and consume is scarce!– Land, housing, food, bicycles, cars, university educations– Fish in the sea, boats, nets, ice, processing machinery, fish

scientists, tuna at the Tsukiji market• Because most resources are scarce, we have to make economic

choices about the use of scarce resources.

What is economics?

• Economics is the study of how society makes economic choices about the use of scarce resources.

MAJOR ECONOMIC CHOICES FISH EXAMPLESHow do we produce things? How many fishermen are there in

a fishery?What kinds of boats and gear do they use?

What do we produce? How many fish do we catch?What fish produces to we make?

How do we allocate what we produce?

Who eats the fish products?How much do fishermen earn?

Economics explains and advises

Explanatory Economics(Positive economics)

Advisory Economics(Normative economics)

Questions include the word “WHY” Questions include the word “SHOULD”

Why are there 10,000 fishermen?Why do they catch 100 tons of fish?

Why is the price of fish $1/fish?

How many fishermen should there be?How many fish should they catch?

What should the price be?

Don’t require the economist to define “objectives” for society

Do require the economist to define “objectives” for society

Less controversial More controversial

EXAMPLE:“Fishermen ignore the beach seine ban because the value of the fish is less than

the cost of the fines”

EXAMPLE:“Fishermen should ignore the beach seine

ban because the value of the fish is less than the cost of the fines”

There is a big differences between these two examples!

How do economists study economic choices?

What are people and firms’ objectives?People try to maximize well-being

Firms try to maximize profitsFishermen try to maximize fishing income

What individual choices do people and firms make given their objectives and

circumstances? How may fishermen fish?

Where do they fish?What gear do they use?

What are the collective implications of individual choices?Total fish catches

Effects of catches on fish resourcesFishing costs, prices & profits

How do collective actions affect individual choices?How do fish resources,

costs, prices & profits affect individual fishermen’s

choices?

How do external factors affect individual choices?

The environmentTechnology

Government regulationsThe weather

Fishing regulations

2. The world changes

• Over time, the world changes• “The only constant is change”• Over time, resources tend to become more scarce:

– Population grows– New technologies arise– Environments change

• Increasing scarcity leads to conflict• Old ways of making economic choices no longer work as well• Societies need new ways of making economic choices

3. As the world changes, societies make economic choices in new ways

Might

Morals

Mandates Markets

Increasing scale and

complexity of society

Increasing scarcity

4. The best way to make economic choices depends upon the circumstances

As the world changes, societies make economic choices about fishing in new ways

MoralsOnly catch what you need

Share your catch with others

MandatesGear limits

Catch quotasEffort limits

MarketsCatch shares

Individual transferable quotas

Increasing scale and

complexity of society

Increasing scarcity

The best way to make economic choices about fishing depends upon the circumstances

5. Incentives matter

• A famous definition of “economics in two words”• People make economic choices based on the incentives they face

– Costs– Prices– Laws

• To change people’s choices, change the incentives they face• A society will be best off if people face incentives to do things which

are good for society as a whole

6. Prices are very powerful incentives

Choices about: Higher prices cause Lower prices cause

Inputs to use Producers use relatively less of inputs as prices riseFishermen use less fuel as

fuel prices rise

Producers use relatively more of inputs as prices fallFishermen use more fuel as

fuel prices fallOutputs to produce Producers produce

relatively more of outputs as prices rise

Fishermen catch more fish as fish prices rise

Producers produce relatively less of outputs as

prices fallFishermen catch less fish as

fish prices fallAllocation of outputs Consumers buy relatively

less of products as prices rise

Consumers buy less fish as fish prices rise

Consumers buy relatively more of products as prices

fallConsumers buy more fish

as fish prices fall

7. Markets drive the global economy and the fish business.

• A market exchange is a voluntary sale, purchase or trade between a willing buyer and willing seller.

• A market is any way market exchanges occur between willing buyers and sellers.

• Markets can be found almost everywhere and for almost everything• Markets are extremely important

Markets are everywhere in the global fish business!

Sidewalk fish seller, Nha Trang, Vietnam

Tsukiji fish market, Tokyo

Pike Pace Market, Seattle, USA

Supermarket, Qingdao, China

Boat for sale, Louisiana, USA

Fishing boat market on the internet, northwest USA

The global seafood industry is driven by markets!

Wholesalers

Stores

market

Fishermen

Processors

market

market

market

Consumers

Some markets which affect fishermen . . .

What is exchanged in the market Who the sellers are Who the buyers areFish Fishermen Fish buyersFish products Stores ConsumersFish quotas Quota sellers Quota buyersBoats Boat builders FishermenProcessing labor Processing workers Fish processorsTrucking services Trucking companies Fish distributorsUS dollars and Tanzanian shillings

Tanzanians buying dollars

Americans buying shillings

8. Markets are natural and occur spontaneously.

Detail from “The Great Fish Market” by Jan Breughel the Elder (1568-1625)

• Markets have occurred throughout history!• Markets are voluntary exchanges between willing buyer and sellers• It is very hard for governments to stop markets:

– Think about markets for drugs and sex!

9. Market prices are signals.

• High prices cause:– sellers to sell more and buyers to buy less– producers to produce more and consumers to buy less

• Low prices cause:– sellers to sell less and buyers to buy more– producers to produce less and consumers to buy more

• Market prices adjust to levels at which:– Sellers sell the amount buyers want to buy– Producers produce the amount consumers want to consumer

• Markets don’t work unless prices can change• Economists argue that governments shouldn’t interfere with market

prices!

10. Markets are driven by self-interest.

• Market buyers and sellers are driven by self-interest• They are trying to help themselves• They are not thinking about others• By helping themselves, they help others• Markets are driven by motives we often consider unethical:

– Self-interest– The pursuit of profit

““It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest.”--Adam Smith

The global food production system is driven by the pursuit of profit.Economists say that is good—because it works.

• Many people think food production should not be driven by profit.

• Economists argue that what matters is not motives but what feeds people• People are more likely to be hungry where governments interfere with

markets• The fish business is not a charity! Economists say we should be glad it is

not a charity

11. Markets don’t need someone to be in charge!

• Markets are decentralized ways of making economic choices• No one necessarily knows, understands or cares what is driving

prices and quantities• No one needs to be in charge• No one is in charge . . .

– Of feeding New York City– Of feeding the world– Of the global economic system

• If governments try to be in charge of markets, the markets may not work as well.

• Governments that think they are in charge of markets have less power than they think

• Markets are often more powerful than governments

The “invisible hand”

“He [the producer] intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”—Adam Smith

12. Markets drive continuous adjustments to changing circumstances

• Where shortages occur, prices rise, signaling producers to produce more and consumers to consume less

• Where surpluses occur, prices fall, signaling producers to produce less and consumers to consume more

• Where products are no longer needed, prices fall, production is no longer profitable, and production stops– Markets drive changes which are necessary—even when they

are painful

Lower prices send market signals to stop producing things we no longer need

13. Markets aren’t “fair” and don’t care about people

• Mainstream economists argue that markets can only help people because market exchanges are voluntary!

• But markets don’t help you if you have nothing to sell, or no money to buy anything!

• Markets don’t care about you—or anyone• Markets aren’t necessarily “fair”• Markets can help some people and harm other people when prices

go up or down• Many people don’t like or trust markets because

– They aren’t fair– They are based on self-interest

• That’s why many people don’t like economists who argue that markets are the solution for everything!

14. Markets are better than governments at making most kinds of economic choices

• Societies need to make millions of economic choices every day• It is very hard for governments to

– Know enough to make good economic choices– Be flexible enough to adjust economic choices to changing circumstances

• Governments don’t necessarily act in the “public interest”– Some governments are corrupt– It is hard even for honest governments to know what “the public interest”– If governments listen to the people (which is good) people are likely to spend

their time and money trying to influence the government (which is not necessarily good)

• Mainstream economists think that:– Most economic choices should be made by markets– Governments shouldn’t interfere with markets– The most important economic role of government is to help markets work well

• But governments can be (but aren’t always) more “fair” than markets—which is why people often want governments to interfere with markets

15. Markets work better with competition.

• Multiple sellers and multiple buyers• No seller or buyer can control the price• Competition is what drive prices adjustments

– Without competition, sellers wouldn’t willingly lower prices– Without competition, buyers wouldn’t willingly raise prices

• Non-price competition also helps markets work better– Competition drives innovation– Competition drives better service

• Fishermen are better off if there are competing fish buyers• Fishing nations are better off if there are competing buyers for their

exports• An important function of government is to promote competition in

markets

16. Not all kinds of competition are good.

• Competition is good if it creates incentives to help others– If fishing companies compete to produce better quality fish

• Competition is bad if it creates incentives to harm others– If fishermen compete to catch fish before other fishermen can

catch them

This kind of competition

between Alaska salmon

fishermen isn’t benefiting the

fishermen or the consumers

17. Whether or not people have rights to resources—such as land and fish—critically affects how people and societies use resources

• Having rights creates incentives to:– create the greatest possible value from those resources– Save and take care of the resources for the future

• Not having rights create incentives to:– Use resources as fast as possible, before other people use them– Not save or take care of resources for the future

• Many economists think that:– most of the problems in fisheries occur when and because

fishermen don’t have rights to the fish– Many of the problems in fisheries could be solved by giving

fishermen rights to the fish

18. Economists think the objective of fisheries management is to create economic benefits for society

• Economists think differently from biologists:– Biologists focus on fish stocks and catches– Economists focus on economic benefits

• Economic benefits are the value created by fisheries minus the costs of fishing

• Economists argue that not achieving potential economic benefits from fisheries is wasteful

• The societies that can least afford to waste potential economic benefits of fisheries are:– Poor societies– Societies which are highly dependent on fisheries

19. Much of the potential value of wild fisheries is wasted.

• The World Bank estimates that $50 billion is wasted annually in the world’s fisheries in lost potential economic value

• Economic waste (lost potential value) has three major causes:

• Overfishing: Catching too many fish and reducing future potential harvests

• Overspending: Spending more than necessary to catch the fish

• Underearning: Deriving less value from the fish than would be possible

20. The fundamental cause of waste of potential value in fisheries are incentives to make choices which are individually

rational but collectively wasteful.

• When people don’t have rights to fish, it can be individually rational to:– Overharvest– Overspend– Underearn

21. The fish business is much more than fishing.

• Fishing is only the first stage in the long distribution chain that gets fish to consumers all over the world.

• Every part of the fish business depends on all the other parts.

• Understanding fisheries requires understanding the seafood business.

• How fisheries are managed profoundly affects their ability to– Compete successfully in global seafood markets– Evolve with and take advantage of market changes and

opportunities