Pirate Economics 101: A Q&A With Invisible Hook Author Peter Leeson

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The crew of the Maersk Alabama, having survived an attack by pirates in Somalia last week, has returned home for a much-deserved rest. But with tensions ratcheting up between the U.S. and the rag-tag confederation of Somali pirates, it’s worth looking to the past for clues on how to tame the outlaw seas.

Peter Leeson, an economist at George Mason University (and an occasional Freakonomics guest blogger), offers a brisk and fascinating look at old-school piracy in his new book The Invisible Hook: The Hidden Economics of Pirates. Leeson agreed to sit down and answer some important piratical questions for us:

Question

The Invisible Hook is more than just a clever title. How is it different from Adam Smith‘s invisible hand?

Answer

In Adam Smith, the idea is that each individual pursuing his own self-interest is led, as if by an invisible hand, to promote the interest of society. The idea of the invisible hook is that pirates, though they’re criminals, are still driven by their self-interest. So they were driven to build systems of government and social structures that allowed them to better pursue their criminal ends. They’re connected, but the big difference is that, for Adam Smith, self-interest results in cooperation that generates wealth and makes other people better off. For pirates, self-interest results in cooperation that destroys wealth by allowing pirates to plunder more effectively.

Question

In the book, you write that pirates had set up their own early versions of constitutional democracy, complete with separation of powers, decades before the American Revolution. Was that only possible because they were outlaws, operating entirely outside the control of any government?

Answer

That’s right. The pirates of the 18th century set up quite a thoroughgoing system of democracy. The reason that the criminality is driving these structures is because they can’t rely on the state to provide those structures for them. So pirates, more than anyone else, needed to figure out some system of law and order to make it possible for them to remain together long enough to be successful at stealing.

Question

So did these participatory, democratic systems give merchant sailors an incentive to join pirate crews, because it meant they were freer among pirates than on their own ships?

Answer

The sailors had more freedom and better pay as pirates than as merchantmen. But perhaps the most important thing was freedom from the arbitrariness of captains and the malicious abuses of power that merchant captains were known to inflict on their crews. In a pirate democracy, a crew could, and routinely did, depose their captain if he was abusing his power or was incompetent.

Question

You write that pirates weren’t necessarily the bloodthirsty fiends we imagine them to have been. How does the invisible hook explain their behavior?

Answer

The basic idea is, once we recognize pirates as economic actors, businessmen really, it becomes clear as to why they wouldn’t want to brutalize everyone they overtook. In order to encourage merchantmen to surrender, they needed to communicate the idea that, if you surrender to us, you’ll be treated well. That’s the incentive pirates give for sailors to surrender peacefully. If they wantonly abused their prisoners, as they’re often portrayed as having done, that would have actually undermined the incentive of merchant crews to surrender, which would have caused pirates to incur greater costs. They would have had to battle it out more often, because the merchants would have expected to be tortured indiscriminately if they were captured.

So instead, what we often see in the historical record is pirates displaying quite remarkable feats of generosity. The other side of that, of course, is that if you resisted, they had to unleash, you know, a hellish fury on you. That’s where most of the stories of pirate atrocities come from. That’s not to say that no pirate ever indulged his sadistic impulses. But I speculate that the pirate population had no higher proportion of sadists than legitimate society did. And those sadists among the pirates tended to reserve their sadistic actions for times when it would profit them.

Question

So they never made anyone walk the plank?

Answer

There was no walking the plank. There’s no historical foundation for that in 17th- or 18th-century piracy.

Question

You write about piracy as a brand. It’s quite a successful one, having lasted for hundreds of years after the pirates themselves were exterminated. What was the key to that success?

Answer

There was a very particular type of reputation that pirates wanted to cultivate. It was a very delicate line to walk. They didn’t want to have a reputation for wanton brutality or complete madness. They wanted to be perceived as hair-trigger men, men on the edge, who if you pushed, if you resisted, they would snap and do something horrible to you. That way, the captives they took had an incentive to be very careful to comply with all of the pirates’ demands. At the same time, they wanted a reputation as being very brutal, as meting out these brutal, horrible tortures to captives who didn’t comply with their demands. Stories about those horrible tortures were relayed not only by word of mouth, but by early 18th-century newspapers. When a former prisoner was released, he would oftentimes go to the media and provide an account of his capture. So when colonials read these accounts in the media, that helped institutionalize the idea of pirates as these men on the edge. That worked marvelously for pirates. It was a form of advertising performed by legitimate members of society that again helped pirates reduce their costs.

Question

What kinds of lessons can we draw from The Invisible Hook in dealing with modern pirates?

Answer

We have to recognize that pirates are rational economic actors and that piracy is an occupational choice. If we think of them as irrational, or as pursuing other ends, we’re liable to come up with solutions to the pirate problem that are ineffective. Since we know that pirates respond to costs and benefits, we should think of solutions that alter those costs and benefits to shape the incentives for pirates and to deter them from going into a life of piracy.


Notorious GDP

Article 1, Section 8 of the United States Constitution grants Congress the power to use federal funds to enlist the aid of privateers to hunt pirates

please see below
http://www.wikisbest.com/node/120

UnderstatementJones

This seems like not that interesting a conclusion. Surprise! People who do things that aren't legal are still subject to economic incentives!

Robot Mistake

"They're connected, but the big difference is that, for Adam Smith, self-interest results in cooperation that generates wealth and makes other people better off. For pirates, self-interest results in cooperation that destroys wealth by allowing pirates to plunder more effectively."

I agree, but only because I am an American White College Educated Land Owning Male with Mayflower heritage.

The comment seems to propose that society proper is the commons and the pirates the shepards. But I believe that is a backwards/ misguided interpretation.

Piracy may very well be the 'war on drugs' of the past centuries. Without moralism both are exercises in control in an unregulated market that are outside traditional command and control structures.

I do hope the book does take this tone.

Additionally, there are a number of historical examples of plank walking in the 17th-18th centuries and I beleive that the author has a duty to explain the comment or offer a correction. This is the New York Times.

The Times, February 14, 1829, pg.3

Read more...

Avi Rappoport

@3 - the NY Times searchable archive only goes back to 1851, so I couldn't find the article you meant.

But I must remind you that 1829 is in the 19th century, a time that romanticized the past and added cliches by the bushelfull.

jblog

"Surprise! People who do things that aren't legal are still subject to economic incentives!"

Also the rules of ballistics.

New rule in the pirate handbook: if you see a U.S Navy SEAL, duck!

tudza

Well, a solution that offers cost benefits could be "Don't do that or your ship gets blown out of the water and you and all your crew die." I would say it is more costly to die a pirate than living by not being a pirate.

Certainly this is simpler than trying to clean up a whole country like Somalia, which seems to be how some people want the job done.

Miriam Makhyoun

I just saw Peter Leeson speak to the Economics faculty at Appalachian State University on Friday and he was brilliant! Thanks for the Q&A.

P

This was a really good book, FWIW.

Leeson is a good economist and a good writer.

Michael Casp

So, you're saying we should shoot the pirates in the head?

frankenduf

pirates are rational?- sounds Orwellian to me

Laserlight

"For pirates, self-interest results in cooperation that destroys wealth by allowing pirates to plunder more effectively."

Pirates generally weren't interested in destroying wealth, just transferring it. When Spain claimedthe New World, their law said you could only ship goods to the Caribbean in Spanish hulls, which meant the colonists in the Caribbean had to pay monopoly prices fo manufactured goods. A pirate would capture a merchantman and sell the goods to the colonists at a smuggler's discount.
Of course, sometimes pirates would raid a settlement, which the colonists wouldn't be so happy about, but my impression is that those raids were usually (not always) more acts of war by privateers (Drake etc), rather than simple piracy.

jonathan

you forgot to mention how the english got rid of pirates, namely by destroying the pirate cities, something we cantwon't do. do you have any suggestions?

Joe Murray

Pirates do not destroy wealth! They move it to another person(s) in another place. When a thief steals a million dollars, he does not destroy it. He uses it to meet his own particular needs, The victim of the theft just doesn't get to spend the money.

Nick

@Joe Murray

When a thief steals a million dollars, it requires the people from whom he stole million dollars to divert otherwise consumer-satisfying money to defense and risk minimization. It is not so much a direct destruction of wealth as it is an indirect one. It is the equivalent to the broken window fallacy to say that it is a mere transfer of wealth to the pirates. If a glass maker breaks a shop's window, they are destroying wealth, in that an asset is now gone (the window), that necessarily directs the shopowner to shift funds from satisfying a consumer to repairing the window.

DeAdvocate

@ Nick,

Defense and risk minimization require paying people to do these things. The wealth is not destroyed, it is redirected to those people whose profession it is to defend and minimize risks, who then spend the money in their daily lives.

Meanwhile, the thief is still spending what he stole, reinvesting the money in the economy.

Hun

...used Huns...
strange Asian riders plundering lands...
Equipped by powerful bows able to quick change their positions, small handy killing men,
their genetic were mixed thanx to women capturing...

All Europe was afraid of them.

The Chinese had to build Chinese wall thanks to them.

Garane

with no government toregulate condcut in an ordarly society, with no opportunities to earn an income and seeing a lot of weath channeled through the sea, and many illegal depletion of their resources by pirates of some other sorts, these men aas the authour rightly points out come together formed their own democracy of extortionsm and unless we give an option out they wil remain to be more than a nuisance...rightly they are on the edge....but now the profits they are ripping is the bigger incentive

Dave B

I really enjoyed reading about pirates from a rational choice economic framework in this book. I recommend it to any interested in pirates or basic economics. I thought it provided a larger picture than traditional historian writings who view and interpret the events through a different,
rarely ever explicit, lens.