Monday, April 20, 2009

Pirate Economics & Social Contracts

Today's New York Times carried a fascinating article that I have reproduced below:

April 20, 2009
Pirate Economics 101: A Q&A With Invisible Hook Author Peter Leeson

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:

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

A 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.

Q 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?

A 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.

Q 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?

A 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.

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

A 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.

Q So they never made anyone walk the plank?

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

Q 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?

A 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.

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

A 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.


An earlier piece, also by Peter Leeson, was published on September 5, 2008, under the title of 'Three Great Social Contractarians: Hobbes, Locke, and … Blackbeard?'
He makes some points about social contracts and their role in effective governance, which I found very interesting, as well as largely impractical.
What do you think?

Peter Leeson, the BB&T Professor for the Study of Capitalism at George Mason University and author of the forthcoming book “The Invisible Hook: The Hidden Economics of Pirates,” blogged here earlier this week about U.F.O.’s and dominoes.

We’ve all heard the idea of the social contract before.
This is the notion of government as the product of a grand, unanimous agreement between society’s members that brings political authority into existence.

In school, we read the great social contract theorists: Thomas Hobbes, John Locke, and Jean-Jacques Rousseau.
And then we’re told that none of it’s really true.

No society literally created its government through a genuine social contract, conventional wisdom goes.
That would require every member of society to voluntarily agree to such a contract’s terms and to express consent explicitly through their signatures.
Even America’s founding, which involved a written “agreement” of sorts, fails this test.
Only a few members of American society actually signed the Constitution, and some disagreed with it but were stuck with its terms nonetheless.

The social contract might be an important analytical device for evaluating government’s legitimacy.
But, taken literally anyway, it’s a myth.
The social contract may be mythical when it comes to societies of honest individuals.
But recent research suggests it’s very real when it comes to some societies of rogues.

Eighteenth-century pirate society had a genuine social contract at its foundation, a unanimous social agreement that created the pirates’ constitutional democracy.
Pirates’ floating societies were forged without government to create government and used actual written contracts — “pirate codes” — to do so.

Pirates weren’t the only rogue societies to forge their “governments” via literal social contracts.
David Skarbek shows that a contemporary California-based prison gang, La Nuestra Familia, has similar social contract foundations, and a recent discovery suggests the Mafia may have a social contract at its base as well.
Could murderers and thieves be more familiar with Hobbes, Locke, and Rousseau than honest citizens?
Probably not.

But criminal societies emerge with very different purposes than regular ones; these differences may account for why Blackbeard’s “government” was a more faithful representation of a true social contract than the U.S. government is.
Rogue societies’ criminality puts social harmony at a premium.
Since any disgruntled member of a criminal society could turn on his comrades and inform authorities of their skullduggery, leading to their capture and punishment, it’s critical to make sure everyone is happy.
This means ensuring everyone is pleased to live under society’s rules and is satisfied with the people who administer those rules.
A social contract, which secures citizens’ unanimous agreement to political rules at the outset and enshrines this agreement in writing, helps to secure such harmony.

In contrast, societies formed without criminal intent don’t confront this problem.
In “regular” societies, a disgruntled citizen can’t bring down the rest of us by tattling to outside authorities.
Here, then, securing every citizen’s agreement to political authority through universal social agreement is less critical.

Of course, there are other important factors that influence criminal vs. “regular” societies’ reliance on genuine social contracts. But the difference between their criminality appears to be an important one.
And, as my forthcoming book The Invisible Hook: The Hidden Economics of Pirates discusses, criminality, perhaps unexpectedly, seems to favor governments based on true social agreement.

What can criminal consent teach us about American government?
A few things, actually.
First, society works best where the need for policemen is least.
Precisely because in self-regulating societies individuals regulate themselves, these societies can afford more freedom and the benefits that come with it.

But self regulation is only possible where most citizens agree with the rules that govern them.
The key, then, is to increase the extent of social agreement underlying the rules that govern society.
There are two ways to do this.
The first way is to try and build greater agreement over the existing range of issues we decide socially (i.e., in the public sphere).
That seems unlikely, though, if for no other reason than Americans are as diverse in their beliefs and preferences as they come.
The second way is to be more modest about the range of issues we seek social consensus on in the first place.

Most of us agree that murder, for instance, should be prohibited.
Making this decision through the political process is unlikely to undermine social agreement.
But there’s much greater variation in Americans’ thinking about, say, what schools should teach fifth graders about sex, whether trans-fats pose an unreasonable risk to one’s health, and whether Andres Serrano produces provocative art or sacrilegious smut.

By depoliticizing decisions — making more of them private choices instead of public ones — we can strengthen the consensual basis of American government, and hopefully enhance social agreement over the rules we have.