The Invisible Hook: The Hidden Economics of Pirates

The world is in the middle (if we're lucky) of the most catastrophic destruction of private and public wealth in the history of free markets. Not the best time, you might have thought, to publish a book that discovers wondrous analogies between classic capitalist laissez-faire and the bloody practices of 18th-century pirates -- and dips the Jolly Roger in salute.

But the people at Princeton University Press know something that disconsolate losers of the Great Recession too quickly forget. The economic libertarianism that brought us this debacle is at the heart of the American Dream. Times will be tough, but no one in Washington is going to shackle our freedom to enrich ourselves, any more than Disney will dump the Pirates of the Caribbean franchise. Why shackle imagination, enterprise, risk taking? Think of the sequel.

Be that as it may, Peter T. Leeson, an economics professor at George Mason University, has given us an engaging twofer of a book. On the one hand we have his guided tour through the grisly business practices of maritime bandit captains like Blackbeard, "Calico" Jack Rackam, Edward England, Bartholomew Roberts, William Kidd, William Taylor, William Fly, and dozens of other entrepreneurial seafarers who preyed on Atlantic and Caribbean shipping in the golden age of piracy, between 1716 and 1726.

On the other hand is Leeson's guidance to the economic underpinnings of this swashbuckling age, in effect a sprightly presentation of some rudiments of Microeconomics 101. Pausing before some particularly ghastly piratical practice -- the brutality, say, that was often visited upon crew and passengers who tried to hide valuables from the "invisible hook" -- Leeson discourses on the miraculous power of the profit motive. Ordinary folk, beguiled by the darker corners of human psychology, might suppose that pirates who did things like tear the living heart out of a prisoner, then roast and eat it before the others, was a psychopathic killer, clinically depressed, with tendencies to necrophilia. Economics, Leeson tells us, has a simpler explanation: the man is merely building his business's reputation for having a "high discount rate," thereby discouraging future clients from offering resistance to the sales pitch.

While Microeconomics 101 is Leeson's main source of amusing piracy analogies, The Federalist Papers is another. It appears that governance aboard a pirate ship was not at all what you might imagine -- a tyranny modified by anarchy. To Leeson, rather, it resembles a more familiar arrangement: a democracy. Captains were elected and could be deposed by vote, and their powers were clearly confined to prize taking and other emergency decisions; justice was the province of the quartermaster, also elected, who ensured the proper (nearly communistic) distribution of booty among the crew, and other less vital matters. Leeson does not shy from discerning in these arrangements a harbinger of the U.S. Constitution.

If Leeson's book belongs to a genre, it is the genre that beguiles millions even now at the end, some say, of capitalism. I mean the "business book," specifically books that probe the writings or careers of great men (no women that I know of) for tips on how to manage or rescue firms and grow them to stratospheric heights of success. The Invisible Hook is not a neat fit in this company: Leeson's repeated analogizing between microeconomics and piracy, and back again, rather confuses the question of who's tipping whom. The tips themselves, however, stand out clearly. One that fascinated me was the aforementioned usefulness of cruelty in the business plan.

I thought immediately, as Leeson might have done, of the very different business practice of the pirates currently raiding sea lanes off the coast of Somalia. Their profits are so huge -- millions of dollars per prize -- as to make their 18th-century predecessors drool. The magnitude of the booty is new, but offshore robbery and shipnapping are not. Opportunity beckons wherever transport costs oblige merchant vessels to sail temptingly close to shore, as around Somalia's Puntland, or to navigate narrow waterways such as the Malacca Straits between Peninsular Malaysia and the (Indonesian) island of Sumatra, or the Strait of Gibraltar between Spain and Morocco. Straits are never dire for maritime banditry, especially where some degree of lawlessness, what Leeson might term "weak market regulation," obtains in neighboring states. Somalia is perfect in this respect, as its business environment lacks any regulations at all -- or, for that matter, any state.

Lawlessness, curiously enough, accounts for one of the cruelest "best practices" of Leeson's pirates, the savagery they visited upon the top officers of certain merchant ships. Many pirates had been merchant seamen themselves before turning to the high-risk, high-return business whose logo was the Jolly Roger. And many bore the scars, often on their backs, of the unconstrained violence with which some captains maintained discipline. What the pirates, as victims of that violence, did on the happy occasion of snaring one of these officers was for them simply an act of retributive justice. The idea seems to have been the noble one of improving outrageous working conditions in the maritime transport industry.

Somali pirates, however, respond somewhat differently to the lawlessness of their seas. They too see themselves as bringers of order and justice. "Think of us like a Coast Guard," one imprisoned pirate explained to a New York Times reporter in Puntland. "We don't consider ourselves sea bandits. Sea bandits are those who illegally fish in our waters and dump wastes in our seas?" One economist, much as Leeson again might have done had he looked into this matter, has asked us to think of the fish issue as a "resource swap" -- $100 million a year in ransomed ships, over against $200 million a year in poached fish for Asian markets. Not a good deal for the Somalis, one might argue. But the balance of trade may be shifting to the pirates: in the first six months of 2009 alone there have been 126 raids on shipping off the Somali coast, including 44 sea-jackings, setting the 15-year-old industry -- already five years longer than the golden age -- on the road to doubling 2008 revenues.

It turns out, however, that the secret of Somali piracy turns on that crucial factor in the 18th-century way of doing business in a lawless marketplace, cruelty. The Somalis don't practice it, and for the same reason that Blackbeard did, a keen regard for the bottom line. Killing and maiming unarmed crew members, even officers, would result in the arming of the freighters, tankers, and yachts on which the sea bandits prey. An arms race would ensue, and not a bloodless one. And so, for the moment, the pirates and the navies of 24 offended nations suffer an unacknowledged stand-off, with neither side -- except, once, on the American side -- daring to break it.

I wouldn't recount this three-century update of piratical business behavior if it weren't for a curious omission in Leeson's book -- curious because it speaks so well of his fond capitalism's moral development.

In all the great 16th-, 17th-, and 18th-century debates over which polity best meets the needs of mankind, one point was repeatedly made by proponents of representative government and unfettered -- that is, no mercantilism -- business enterprise. The point was that state power and wealth power were not safe in the hands of monarchs and aristocrats. Their innate pride and quarrelsomeness had led, and inevitably would lead, to endless wars, within and between nations and empires. Far better, it was argued, to vest the middling, and one day even the lower classes, with access to both forms of power: the theory being that they would be too busy making a living to think of making war. Peace would reign. An overly optimistic prediction, as we know. Still, in the seas off Somalia, the fragile peace amid frantic commerce represents some sort of triumph of modern polities, and Leeson should have hailed it.

I recommend The Invisible Hook nonetheless -- for sober libertarians who need to brush up their laissez-faire economics, and for pirate fans in need of sobering by a lighthearted practitioner of the dismal science.

April 17: "In less than three years, both GM and Chrysler would be bankrupt, and a resurgent Ford would wow Wall Street..."

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