Behavioral economics: Reunifying psychology and economics

“Behavioral economics” improves the realism of the psychological assumptions underlying economic theory, promising to reunify psychology and economics in the process. Reunification should lead to better predictions about economic behavior and better policy prescriptions.

Why fisheries collapse and what to do about it.

With the collapse of fisheries in many parts of the world causing widespread economic harm, attention is focused on a possible cause and remedy of fishery collapse. Economic theory for managing a renewable resource, such as a fishery, leads to an ecologically unstable equilibrium as difficult to maintain as balancing a marble on top of a dome. A fishery should be managed for ecological stability instead--in the analogy, as easy to maintain as keeping a marble near the base of a bowl. The goal of ecological stability is achieved if the target stock is above that producing maximum sustainable yield and harvested at less than the maximum sustainable yield. The cost of managing for ecological stability, termed "natural insurance," is low if the fishery is sufficiently productive. This cost is shown to pay for itself over the long term in a variable and uncertain environment. An ecologically stable target stock may be attained either with annually variable quotas following current practice or, preferably, through a market mechanism whereby fish are taxed at dockside if caught when the stock was below target and are untaxed otherwise. In this regulatory environment, the goal of maximizing short-term revenue coincides with the goal of ecological stability, thereby also maximizing long-term revenue. This new approach to fishery management is illustrated with the recently collapsed Newfoundland fishing industry. The Newfoundland cod fishery is expected to rebuild to an ecologically stable level in about 9 years and thereafter support an annual harvest of about 75% of the 1981-1990 average.

National policies for technical change: Where are the increasing returns to economic research?

Improvements over the past 30 years in statistical data, analysis, and related theory have strengthened the basis for science and technology policy by confirming the importance of technical change in national economic performance. But two important features of scientific and technological activities in the Organization for Economic Cooperation and Development countries are still not addressed adequately in mainstream economics: (i) the justification of public funding for basic research and (ii) persistent international differences in investment in research and development and related activities. In addition, one major gap is now emerging in our systems of empirical measurement—the development of software technology, especially in the service sector. There are therefore dangers of diminishing returns to the usefulness of economic research, which continues to rely completely on established theory and established statistical sources. Alternative propositions that deserve serious consideration are: (i) the economic usefulness of basic research is in the provision of (mainly tacit) skills rather than codified and applicable information; (ii) in developing and exploiting technological opportunities, institutional competencies are just as important as the incentive structures that they face; and (iii) software technology developed in traditional service sectors may now be a more important locus of technical change than software technology developed in “high-tech” manufacturing.