Iceland, Britain and the EU are all parties to a fishing quota agreement on how many fish each country can harvest from the ocean. Iceland and the Faroe Islands unilaterally raised their quota which seriously angered the other parties. There is talk that the mackerel population will be wiped out, the fishing industry will suffer and people will lose their jobs. Countries like Norway are closing their ports and refusing to trade. There is talk of a mackerel war, similar to the cod wars of the 1950s and 1970s.
This story is a gold mine for economic lessons. There are things we can learn about the negative incentives created by common property, the escalatory nature and negative economic effects of protectionism, why cartels are never very stable, the unsustainability of using regulations and quotas in place of a market, and how all of these problems can be solved or avoided if property rights are assigned.
Let’s look at each of the issues in more detail.
The root of this whole mess is because the ocean is an economic public good, that is, it is non-rival and non-excludable. In other words, just because I am using the ocean, it doesn’t preclude you from using the ocean. Also, anybody and everybody that wants to use the ocean can – nobody is excluded. These two properties create very bad incentives. Since the fish in the ocean are a finite resource and nobody owns them, the incentive is to catch as many as you can before the other guy catches as many as he can. The result is a mad rush to over-fish the oceans. We are seeing exactly this. Such a system is clearly not sustainable and the fears that the mackerel population might be wiped out are justified.
In response, Norway is closing its ports to Icelandic ships, thus voluntarily giving up the clear benefits of Comparative Advantage, and the EU and Scotland are considering similar action. This doesn’t make any sense. Protectionism is never a good idea and retaliation for protectionism is equally as folly. It’s unfortunate that politics dominate a country’s actions, rather than sound economic policy leading the way.
From Struan Stevenson, the senior vice-president on the European parliament's fisheries committee,
"That is what I am actually suggesting now. We should use that as threat. We should follow the example of the fishermen in Peterhead. We should threaten to close all the EU ports to Faroese and Icelandic vessels, block all imports from these countries, and show them that we mean business."
There is no question that blocking trade would hurt Iceland and the Faroe Islands, but it would also hurt the EU. I have never understood the policy of actually hurting your own country’s economic well being simply to make a political point.
Quite frankly none of this comes as a surprise, as it was set up to fail from the beginning. Rationing, quotas and resource boards are about the most inefficient way allocate resources.
From the article,
“If maintained, said WWF Scotland, the combined 2010 mackerel quota would result in the fish being exploited 35% above the scientific recommendation set by the International Council for the Exploration of the Sea, and spell a "death sentence" for precious fish stock.”
The scientific recommendation set by the International Council for Exploration of the Sea? How much more bureaucratic can you get? Command-and-control never works. No central planning commission could ever possibly have enough information to know what supply and demand of mackerel looks like, the appropriate number for each country to harvest, the best way to achieve these quotas or how sustainable such a system can be. Only the market, through the signals sent by prices and dispersed information could possibly allocate everything efficiently and sustainably. Unfortunately, a market only works when there is private property.
Since the ocean isn’t private property, it seems we are left with inadequate solutions like planning and control boards. So why then, and how, does this commission fail to achieve a sustainable outcome? Why did Iceland break from the quota agreement?
Well, the agreement between nations on how much fish to catch is basically a cartel. Each nation assures every other nation that it will set a limit on fish and stick to it. The only problem is that the incentive to “cheat” on such a system is strong. By nations agreeing to limit how much they catch, they are basically agreeing to limit their profit by leaving valuable fish in the ocean. As such, it is very tempting for other nations to seize on the vulnerability of their counterparts and “snatch up” the extra fish, thus increasing their own profits. We have seen Iceland and the Faroe Islands do exactly this.
What will be the response by other nations? Well, in addition to the trade wars, don’t be surprised if other nations increase their quota as well. Now that Iceland and the Faroe Islands have shown that they’re willing to collect extra valuable resources, other nations will race to collect as many as they can before Iceland gets them all. The cartel is broken so all bets are off.
Clearly this is a losing situation all the way around. The oceans are being over-fished and trade wars are resulting. Nobody wins. The frustrating thing is that the solution is so simple – property rights! If property rights are established, fishing no longer becomes a race to the bottom because it would be in each individual’s (or nation’s) best interest to ensure sustainability. Right now, the incentive is to get as much as possible before everybody else does and it’s all gone.
If property rights were created, people would no longer be free to fish to exhaustion. Only the property owner would be able to fish to exhaustion, but he would never do that because he would have customers that would be willing to pay to get his fish. If he runs out, he loses his customers. Through sustainable practices such as these, we can ensure that as long as there is demand for mackerel (or any resource), there will a supply ready and waiting.
And this solves every problem mentioned above. Obviously the incentive to overfish is eliminated, therefore there will be no quotas, regulations or control panels, therefore nobody will have the incentive to cheat, therefore nobody will enact retaliatory protectionist policies, therefore there will be no trade war.
Okay, well that all sounds good, but how in the world do we assign property rights to the ocean? Are we going to fence off sections of the ocean? Even if that were possible it would surely be a case of the solution being worse than the problem. But there are several viable solutions including a form of electronic fencing, a permit system similar to cap-and-trade, Individual Transferrable Quotas (ITQs), a deposit-refund system similar to that of soda bottles, and even assigning property rights to the fish themselves.
The body of literature on this idea of assigning property rights to the ocean is vast, and the ideas for how to do so are too numerous to go into any detail here, so I offer below a brief list of just some of the great ideas on this issue, and to give an idea on the robust consensus among economists.
The Privatization of the Ocean
Let’s Homestead the Oceans
Why Oceans and Waterways Should Be Privatized
Want To Prevent Piracy? Privatize the Ocean
Law, Property Rights, and Air Pollution
Healing Our World: The Other Piece of the Puzzle
For a New Liberty
Water Privatization
Property – The Great Problem Solver
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