Some of the Most Important Things to Know about Fish Economics

1. Some of the Most Important Things to Know about Fish Economics Lecture Prepared for the United Nations University Fisheries Training Program Reykjavik, Iceland Gunnar Knapp Professor of Economics Institute of Social and Economic Research Anchorage, Alaska USA Gunnar.Knapp@uaa.alaska.edu January 2013

2. 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

3. 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.

4. Economics matters! “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 • 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”

5. 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)

6. 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.

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

8. Economics explains and advises

9. How do economists study economic choices? What are people and firms’ objectives? People try to maximize well-being Firms try to maximize profits Fishermen try to maximize fishing income How do external factors affect individual choices? The environment Technology Government regulations The weather Fishing regulations 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? How do collective actions affect individual choices? How do fish resources, costs, prices & profits affect individual fishermen’s choices? What are the collective implications of individual choices? Total fish catches Effects of catches on fish resources Fishing costs, prices & profits

10. 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

11. 3. As the world changes, societies make economic choices in new ways Increasing scale and complexity of society Increasing scarcity Might Morals Mandates Markets 4. The best way to make economic choices depends upon the circumstances

12. As the world changes, societies make economic choices about fishing in new ways Morals Only catch what you need Share your catch with others Increasing scale and complexity of society Increasing scarcity Mandates Gear limits Catch quotas Effort limits Markets Catch shares Individual transferable quotas The best way to make economic choices about fishing depends upon the circumstances

13. 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

14. 6. Prices are very powerful incentives

15. 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

16. Markets are everywhere in the global fish business!Sidewalk fish seller, NhaTrang, Vietnam

17. Tsukiji fish market, Tokyo

18. Pike Pace Market, Seattle, USA

19. Supermarket, Qingdao, China

20. Boat for sale, Louisiana, USA

21. Fishing boat market on the internet, northwest USA

22. The global seafood industry is driven by markets!

23. Some markets which affect fishermen . . .

24. 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!

25. 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!

26. 10. Markets are driven by self-interest. ““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 • 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

27. 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

28. 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

29. 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

30. 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

31. 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!

32. 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

33. 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

34. 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

35. This kind of competition between Alaska salmon fishermen isn’t benefiting the fishermen or the consumers

36. 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

37. 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

38. 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

39. 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

40. 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