What Do Fishermen and Investment Bankers Have in Common?

Icelanders love taking insane risks. In 1973, when a volcanic eruption threatened to wipe out a town on the island of Heimaey, they bet they could stop the lava flow by shooting it with millions of gallons of frigid Icelandic sea water. Unbelievably, they won. Nobody in human history had beaten a volcano before, and nobody’s done it since.

That’s the same fearless, impassioned spirit in which Icelanders go fishing. It served them well–for many years, fishing was Iceland’s primary industry.

Then they discovered investment banking.

Michael Lewis’s absolutely must-read article takes the story from there, riffing on–among many other things–a classic paper on the economics of fishing to tell the tale of Iceland’s rise and fall in global finance, and how it fits into the bigger picture:

Fishermen, in other words, are a lot like American investment bankers. Their overconfidence leads them to impoverish not just themselves but also their fishing grounds. Simply limiting the number of fish caught won’t solve the problem; it will just heighten the competition for the fish and drive down profits. The goal isn’t to get fishermen to overspend on more nets or bigger boats. The goal is to catch the maximum number of fish with minimum effort. To attain it, you need government intervention.

Government intervention saved Icelandic fishing, but not its banks. Maybe we can set up an exchange: We’ll teach Iceland what we know about banking regulations, and they can teach us about volcano monitoring.