Pirate Economics

Earlier tonight I had the privilege to attend a lecture by Peter Leeson, where he discussed his book, The Invisible Hook: The Hidden Economics of Pirates.

Most people think of pirates from the early 18th century as being barbaric, uninhibited people. Actually, pirates were rational profit-maximizers, just like many businessmen. To illustrate this point, I’m going to briefly discuss three inaccurate myths that most people associate with pirates, and then explain how economics actually drove their behavior. To read more in depth on this topic, you can check out Leeson’s book linked above or his paper, Pirational Choice.

Myth #1: Pirate ships were full of reckless and chaotic behavior; there were no rules.

Actually, pirate ships had a type of radical democracy, complete with a constitution. Some of the main points were that there were to be elected leaders, and each pirate had one vote in elections. The pirates had the power to replace their captain at any time, for any reason. There was also a system of checks and balances, where a second-in-command leader on the ship, called the Quarter Master, wielded more power than the captain in some areas.

Most merchant ships of the time had a hierarchy in place, which would result in the captain abusing his powers. Not only that, but the financiers of the ships were not usually on board which resulted in a principal/agent problem. Because pirates stole their ships and through their “pirate code,” they were able to avoid these issues that plagued others.

Myth #2: The pirate flag, called the Jolly Roger, was flown as a sign of pride.

The Jolly Roger was actually used as a signaling device — a way for pirate ships to distinguish themselves from others. To pirates, fights were very costly: crew would die, goods would be damaged, sometimes even the ship they were fighting to take over would end up sinking. Therefore, to minimize their costs, pirates wanted to take over ships as peacefully as possible, much unlike the way we visualize their actions today.

Besides worrying about being taken over by pirates, merchant ships also worried about being attacked by coast guard vessels from other countries. While these coast guard vessels could threaten violence, they wouldn’t be able to act upon their threats, unlike the pirates. Pirates used the Jolly Roger as a way to distinguish themselves from these other vessels and show that they meant serious business.

Myth #3: Pirates were barbarian and tortured others for pleasure.

While many pirates did enjoy torturing others, there lies economics behind these actions. Pirates needed to torture people, at least initially, to build up their reputations and avoid a “credible commitment” problem. By investing in their reputation up front, people viewed their threats are credible and would often comply peacefully. If the pirates made empty-level threats and didn’t follow through with them, who would take them seriously? In fact, once their reputations were built up, many pirates didn’t even need to resort to violence. (That’s not to say that some didn’t regardless.) Blackbeard, one of the most notorious and feared pirates, is never actually attributed to killing anyone.

While the above economics apply to pirates from the 18th century, keep in mind that pirates today are a much different story, as they have different motivations and methods of operation. Regardless, next time you’re watching Pirates of the Caribbean, you can point out all to all your friends the hidden economic principles that drive Jack Sparrow and his crew’s behavior.