The getting of economic wisdom

Everyday proverbs offer simple ‘truths’ that can help explain the economic principles underpinning everything from the way we shop to complex fisheries management decisions

By Sarah Jennings

As we grow older, we all tend to have those sobering moments when we hear ourselves sounding just like our parents. For me, many of these moments come while explaining (to audiences of varying experience and enthusiasm) how economists think about problems involving the exchange, allocation and distribution of resources.

For example, one of the fundamental issues examined in economics is the scarcity of resources, relative to all the things we want to do with them. At every turn there is the need to make a choice and, consequently, there is an inevitable cost in the form of opportunities forgone.

As an economist I explain this to my audience using hypothetical examples involving commodities like wine or widgets. However, my mother’s sayings cut straight to the point: You can’t have your cake and eat it too and There is no such thing as a free lunch. These proverbs capture this fundamental economic problem incredibly effectively and resonate with my audiences.

My mother had a black belt in proverbial expression, tossing these pearls of wisdom into conversation at any opportunity. While her fondness for proverbs used to irritate me, I have grown to appreciate their power in demystifying many of the concepts and ideas found in economics.  

Fisheries are complex biophysical-human systems, where neither an individual fisher’s best decision, nor the socially preferred management action, is always obvious. However, the ability to think as an economist, and a familiarity with economic approaches and tools, can help with both. Here my mother’s expressions come into their own.

The nature of value

Beauty is in the eye of the beholder was my mother’s way of asserting the subjective nature of value – that the value of a good is not determined by any inherent property of the good or solely by the cost of producing it, but instead by the importance individuals place on a good for the achievement of desired ends.  

Knowing that an individual’s assessment of value is subjective, expressed through their willingness to forgo other desired ends, can open the door for seafood marketers to create new markets and expand existing markets for previously under-utilised species, such as Australian Salmon and Bonito.  

And recognising the diverse preferences and capabilities of individuals – One man’s trash is another man’s treasure – helps make sense of economists’ assertions that voluntary exchange between individuals (be it the barter of services between fishers or the purchase of new fishing gear in the market) can increase wealth in society as goods and services move from those who value them less to those who value them more. (Fair exchange is no robbery.)

Choice on the margin

When considering how best to allocate scarce resources between different uses, One step at a time cautions of the need to focus our thinking at the ‘margin’. Take a commercial fisher deciding whether to stay a day longer at sea this season in the hope of increasing his catch, or to return to port as planned to enjoy time with family. The answer to this problem lies not in comparing the value the fisher puts on the total amount of time he devotes to the two activities (fishing and leisure) but rather the value of an extra day spent fishing and the value of this same day were it instead spent with family.  

It is only when the value of fishing exceeds the value of time with family that the day is best spent at sea; otherwise the fisher will do better by returning to port.   

Sunk costs

But, in calculating these ‘marginal values’, the fisher should heed my mother’s caution: It’s no use crying over spilt milk. The extra day at sea will incur additional fuel, crew and bait costs (among others). But there will be no additional costs in terms of his vessel insurance and fishing licence. In the language of economics, these are ‘sunk’ costs and are not affected by how the fisher decides to spend the day in question.  

Many a recreational fisher has succumbed to the pitfall of prioritising sunk costs, and staying too long on the water when the fish are not biting in a bid to ‘get their money’s worth’ from money spent on items such as insurance and licence fees.

Market signals

On the working of markets, my mother insisted that In the country of the blind, the one-eyed man is king, recognising that it is relative (and not absolute) prices and profits that signal shortages and surpluses in markets. These signals encourage buyers and sellers to change their behaviour and reallocate resources to where they are most valued.  

In competitive seafood markets (where there are many buyers and sellers) these adjustments occur continually. Shifts in tastes away from one seafood product will reduce its demand and price, motivating suppliers of the affected product to move their resources to other now more lucrative ventures.

Spillover effects

It takes two to tango echoes the words of Nobel laureate and economist Ronald Coase on two fronts. First, Coase emphasised the reciprocal nature of externalities or spillovers – consequences of an economic activity that are experienced by a third party. For example, a farmer may build a barrier to prevent water flowing through his property, giving him more land to farm, and the opportunity to increase farm productivity and profit. But restricting the flow of a waterway may cause downstream harm to a fisher because it has a negative impact on the breeding of targeted fish species. Efforts to restore water flows and fish breeding by removing barriers then impact on the farmer’s ability to farm – the reciprocal externality.

Second, Coase also argued that if the right to determine the fate of the waterway is well defined and there are no or low costs in ‘transacting’ to resolve the issue, the two parties will coordinate to strike an efficient, mutually beneficial deal regardless of whether the rights are assigned to the farmer or the fisher. These ‘transactions’ might range from compensation for lost productivity, to a joint environmental initiative to balance the productivity of both parties.

The challenge is to apply economic thinking by comparing the costs and benefits of alternative courses of action to find the best mix of Coasian, market and government solutions. In cases where the costs of addressing the externality exceed the benefit, again we could heed my mother’s words and do nothing (Let sleeping dogs lie).

Consumer preferences

My mother’s insight that Actions speak louder than words was none other than a reference to ‘revealed preference’, an economic theory of consumption behaviour which maintains that consumers consider a set of alternatives before settling on a purchase decision, and that the chosen option must therefore be the preferred one.  

Revealed preference theory provides the basis for empirical studies that use data on observed seafood buying behaviour to measure consumers’ preferences, potentially including their willingness to pay for a certified or eco-labelled product. My mother’s words suggest this kind of data is more credible than consumers’ statements of purchasing intent, which may, for example, reflect higher-order ethical values.  

Proverbial policy making

I have discovered that my mother’s words also resonate with policy makers and managers.  On the perils of allowing unfettered access to an open-access resource, such as a wild fish stock, my mother’s saying Too many cooks spoil the broth foreshadows the inevitability of a poor outcome, with too many fishing boats chasing too few fish, each boat owner being rewarded with low profits, or, in the very worst case, fishery closures.  

My mother even had an expression for one of economists’ historically favoured solutions to this so-called ‘race to fish’ problem, namely the establishment of property rights – Good fences make good neighbours. By creating a long-term interest in a share of the total harvest in a fishery, individual transferable quotas (ITQs) have been shown to reduce fishing capacity, increase fisher profit, and discourage ‘race to fish’ behaviours.  

Even a broken clock is right twice a day was my mother’s way of warning of the law of unintended consequences, whereby The best-laid plans of mice and men lead to outcomes that are not foreseen or intended by a purposeful action. Attempts to maintain fish stocks at desired levels by controlling fishers’ inputs (such as gear restrictions) have been shown time and again to result in ‘effort creep’. More time and effort is needed to catch the same amount of fish, which wastefully dissipates profits.

Needless to say, not all of my mother’s sayings accord with sound economic thinking. One man’s loss is not always another man’s gain, as evidenced by the negative outcomes that sometimes perversely arise, such as when spatial closures relocate fishing, alter fishing practices and undermine fisheries management goals, turning anticipated overall gains into losses.  

And while past fishers and fisheries managers may sometimes have behaved as if there were no tomorrow, we now know that at any specific time and place there are not always more fish in the sea.

My mother wasn’t an economist. Nor is economic thinking merely an obscure restatement of the wisdom imparted by our parents through their sharing of proverbial expressions.   
Rather, these ‘pearls’, where their meaning aligns with the economic way of thinking, can help people grasp important concepts that can enhance decision making in their personal and professional lives, and in civil society.

There may also be important lessons to be gleaned by economists from the study of proverbial expressions. As culturally relevant expressions of ‘truths’ based on common sense or experience, proverbs may provide a powerful lens through which to understand economic behaviour and stakeholder values and attitudes. In so doing, they help us shape more effective approaches to support resource allocation, to achieve compliance and to design institutions that promote cooperative behaviours.  

The FRDC has been working to address the shortage of economic expertise to support the development of policy around the fishing and aquaculture sectors. Over the upcoming issues of FISH magazine, we will showcase some of the work being done in this space. Sarah Jennings is a resource economist who has been leading the FRDC’s fisheries economics capacity building initiatives, which are managed through the Social Science and Economics Research Program. Sarah acknowledges the vital contribution of Michael Brooks to helping her unpack their mother’s words in the getting of economic wisdom. 

FRDC Research Code: 2008-306

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Sarah Jennings