Monday, January 05, 2009

Something fishy about the free market?

I am no economist nor an economist's son, so correct my faulty thinking here please.

The free market is frequently trumpeted as the best thing since sliced bread, bringing wealth and happiness to millions through the wonders of the invisible hand that guides producers to make just what consumers desire. It's so efficient: rather than the farmer or factory owner or politician having to guess how many litres of semi-skimmed organic milk to produce, demand will set the right price. Consumers happily buy just as much as producers are bottling. This is because the market signals shifts in demand to the producer. Not enough milk coming through? The competition for milk will push the price up, giving the farmers incentive (and capital) to produce more and the consumers incentive to cut back until there is equilibrium once more.

But there is a certain situation in which this mechanism might actually be the worst possible one. Think about fish. The rivers, lakes and oceans have long been an important source of food for all kinds of cultures. And fish are a renewable resource; so long as we don't take all the fish out of the water, some will reproduce to ensure tomorrow's meal as well. But under free market conditions, a finite renewable resource will inevitably be overexploited. If a certain kind of fish is being fished faster than its natural rate of reproduction, fairly soon the fishing boats will return with smaller catches. This reduction in supply will push prices up, reducing consumer demand. Yet higher prices also justify further exploitation of the resource. If it can be sold for a higher price, it makes sense to put more resources into catching that species of (now rarer) fish. Although this higher price is a warning signal that the limits of the resource's ability to renew itself are being reached, the market actually rewards those who keep exploiting it if they can.

This is why regulation is important to avoid killing the goose that lays the golden egg. But of course, fishing is perhaps the classic case in which regulation is very difficult to enforce as it involves many countries and the tragedy of the commons. Also, since no country wants to be the first to cut down its industry, fishing is actually massively subsidised around the world, making the problem worse.*

There is, of course, a deeper problem than the free market, and that is our belief in the possibility and desirability of infinite growth. We need to learn that finitude is a gift.
*From Wikipedia:

"A major international scientific study released in November 2006 in the journal Science found that about one-third of all fishing stocks worldwide have collapsed (with a collapse being defined as a decline to less than 10% of their maximum observed abundance), and that if current trends continue all fish stocks currently fished will collapse within fifty years. However, they also conclude that "available data suggest that at this point, these trends are still reversible"."
For those worried about the effects of their consumer choices on overexploited fisheries, here is a pocket guide giving information about which species are under threat.


Mister Tim said...

Well, your analysis looks spot on to me. Although the one missing element is that free market economists may say that as it becomes harder to catch the rarer fish, it will therefore become more expensive to do so and better returns can be made by fishing for more common fish. Even though they sell for a lower price, they cost less to catch and therefore once greater profit can be made from those types of fish, producers will move to focus on them instead of the depleting rare one.

byron smith said...

Yes, that's true. However, another aspect of the overfishing tragedy is that most fish remain profitable to catch at sizes smaller than the reproductive age. Thus, recovery from overfishing takes much longer since the remaining stock need to grow up before they can reproduce.

And when this is taken to an extreme with some very slow maturing fish, then catching some species is just stupid - like the orange roughy.

Jonathan said...

That seems to be the most obvious limitation. Of course, whenever regulation is used for some reason, we then go on to measure the "cost" of the regulation by seeing what price change would have "the same" effect. Then the free market idea could be more of a model than an unquestionable principle. Does it serve that purpose any better?

Plessey said...

This is slightly offtopic.
I was listening to a podcast from CBC where there was a discussion about how the Northern Cod of Newfoundland have been almost destroyed in the last 100 or so years of "scientific" management. So much so that in 1992 there was a ban that exists even today. The interesting thing is that by fixing fishing quotas without really understanding the underlying ecology of the cod fish scientists were quantifying something which is virtually impossible to quantify (at least that's the post 1992 thinking). So a humility there among scientists that is rare to see.

Regarding the size of fish it seems overfishing has now created a change in the cod as you mentioned the female fish now matures much earlier when it is much smaller. The smaller fish can escape through the trawl nets so a kind of genetic pressure on early maturing.

Mister Tim said...

The other element is that the market doesn't respond instantaneously (except perhaps in theory), in that consumers may decrease their purchasing of a given product, but it will take time for the producers to get the signal that they should decrease production. This isn't such an issue with, say, pricing cups of coffee in a cafe, but may have disastrous effects in ecological terms if immediate action is needed (to protect endangered species, or just climate change in general).

Of course, a flipside of all this is that a free marketeer may say that the market doesn't value the preservation of a species; if people really wanted to save it, they would stop buying it or would find some other way of paying for its preservation. But someone like me would say that it's sometimes too difficult to put a price on everything and that people are too stupid to stop and think about such things anyway, even if you do, and maybe there's a role for governments here to try to counteract that stupidity.

byron smith said...

Yes, I'm with you all the way here.

byron smith said...

Overfishing threatens 60-70% of penguin species. We are simply better at getting their food than they are.