So if you're interested in further discussion of Pirate Economics, here we go! If you are not interested in reading an economic discussion of pirates, I would skip this post. See you tomorrow!
Essentially, we can assume that everyone is self interested, and this self interest is subjective. To one completely selfish person, this would only include themselves and maybe one or two close relationships. To a more widely interested person, "self" interest would include themselves as well as their family and friends. This is a general assumption of economics.
Secondly, we can assume that all people act rationally in that they use the most efficient means to reach their ends or goals. Example being if I want to graduate with a degree in Marketing and a concentration in Economics, I will study Marketing and Economics. Third, incentives matter. People respond positively to incentives and negatively to disincentives or taxes.
So according to Peter Leeson in his text The Invisible Hook, pirates are not benefiting society by creating wealth like a rational human being would, but rather they are siphoning off existing wealth to benefit themselves and their Piratical society.
This society can exist only if people cooperate. Obvious obstacles to cooperation among crew members become apparent, such as the fact that they are pirates and therefore criminals. They have no property rights and they are incredibly violent. So, to offset these obstacles (amongst other things) they devise a set of rules or a "code."
So given the above assumptions, and given the piratical society was (and it was, this isn't theoretical) efficient, why would you choose to be a pirate? Because it is more profitable than the alternatives.
Let's look at the alternatives: a Merchant Ship was, at the time, the alternative to pirating. It was a legal use of the skills required to do both pirating and being a sailor. The problems with merchant shipping we're weighed against the costs of becoming a pirate for people at the time like people would weigh the problems with being a banker against the costs of becoming a bank robber. Sure one is much more beneficial, but it is a lot harder to do and get away with. The costs are hard to except for a rational person.
Other problems, from an economic standpoint, would be the hierarchy arrangement of a merchant ship. An absentee owner owns the ship, but a captain runs it. This disconnect created an incentive for the captain to shirk his responsibilities and slack off. Owners attempted to correct this problem by giving captains equity or stock in the ship and it's earnings. Kind of like commission based salary.
However the relationship between the captain and the crew would be strained much like the captain and owner relationship. In this situation, much like above, the crew would have an incentive to shirk their duties and slack off. To solve this, the captain is given higher authority. This absolute authority would lead to captain predation, or an abuse of power. Naturally, the captain abuses his powers and treats his sailors like crap because he can. He can keep more wealth for himself as well as keep rations and other benefits for himself. This led to conflict which ultimately means that this system of a Merchant Ship is flawed.
This power abuse brings up Madison's Paradox. James Madison wrote that a power strong enough to protect is a strong power. A strong power is strong enough to predate, or hurt, what it is protecting. The solution to this problem was realized by pirates long before the founding fathers amended the US Constitution that we all hold so dear today. The solution is constrained power. They devised a constitutional democracy that, at the time, was more liberal than our first constitution. By having a separation of powers, unanimous consent by members, and credible commitment and constraint on captains, pirates could successfully live amongst each other.
First, we have separation of powers. In pirate society, there are Captains and Quarter Masters. Captain decisions were restricted to battle decisions. Quarter Masters were trusted with the decisions to divide booty and rations for crew members, as well as acting as a human resources manager, only with a gun and a violent attitude. This separation of powers is much like the system of checks and balances we have now where there are three branches of government.
So, Peter Leeson writes that there were three keys to pirate success. First, pirates wanted to prevent conflict. Why? Because conflict was costly for everyone involved. How they prevented this was their constitution, their unanimous consent to rules, and most importantly, the fact that people could voluntarily enter or leave the piratical society. They did this because of "Tiebout competition". This states that there is competition within rules. If you have two conflicted ideas of governance, the "better" set of rules wins out. Naturally, people gravitate towards the place with the best rules. People preferred pirating to merchant shipping partly because of the rules of the pirate society versus the latter.
The second key to success was that pirates wanted to prevent negative externalities. A negative externality is a situation in which the private cost of an action does not outweigh the social costs of an action. An example would be pollution, the costs for me to dump oil into a lake is very little, but the costs for that action to the fisherman and the environmental committee are higher even though they had nothing to do with the action. So, on a pirate ship; drinking, fighting, having women on board, being loud, and smoking are all negative externalities. All of these actions may be very low cost for one person, but ultimately it is a high cost for the entire ship. All of them result to conflict within the crew which, in turn, result in bad voodoo for everyone, even if you aren't involved with the original action.
The third and final key to success is that Pirates could provide public goods when you could not do so on the market. A public good is a good that is non-rival and non-excludable in consumption. Non-rival means that one person using the goods does not reduce another persons use of the goods, like knowledge or national defense or listening to the radio. Non-excludable means you can't produce a good and keep other people from getting it, like air, listening to music or again national defense. So providing these goods in a market would produce a "free-rider" problem leading again to mutual gains from cooperation.
A few examples of public goods on a pirate ship would be the overall cleanliness of a ship, and having workman's comp. Also, to deter the "free-rider" problem, pirates implemented the policy that if you are caught free-riding, you get killed or left for dead.
The final point of discussion I'll go into here is how pirates used the Jolly Roger as a signal. The Jolly Roger, for those of you who don't know, is the pirate flag. It's many variations I will mention below.
So in using the Jolly Roger, pirates we're attempting to signal two things. One, they needed to approach their prey without the merchants knowing pirates were coming their way. Pirates would signal good intentions by raising a merchant flag (not the jolly roger), hiding their cannons, and by sailing slowly toward the vessel of choice.
Second, they needed to attack the merchant ship. The goal than becomes to minimize the costs (conflict) while maximizing profit (the booty). To do this, they raise the Jolly Roger. Now you may ask that just raising a flag is pretty easy to imitate. However, there was a separating equilibrium for flying the Jolly Roger. If any ship was found with the flag on board, the punishment was death by hanging. So obviously, if you had the balls to fly the flag, you had the balls to be a pirate and would probably hurt the merchants if it came to it.
The different variations of flags is how pirates differentiated between being weak and strong. Some pirate crews may have been too nice or too aggressive. The best pirates were the ones that struck a good balance between those, as the outcomes for being too nice or aggressive was that merchant ships would fight back. So, one crew would fly this flag and merchant ships would no how to react, as opposed to seeing this flag and pissing their pants. This is an early way of branding. One flag would be the coke brand and another the pepsi brand. Kinda cool huh?
Well that's all I wanted to say about the Invisible Hook. I hoped you enjoyed just a little bit of this. Please ask questions if you don't understand! I like to explain things so I would take great pleasure in talking to you if you're not sure about any of this or if you found it the least bit interesting.