From In The Black: In the trenches
The likes of actor Johnny Depp, with plenty of help from Hollywood, have in recent times romanticised the image of pirates and privateers. There he was charging about as Jack Sparrow in the blockbuster movie Pirates of the Caribbean, causing many a swoon and coining around US$2.7 billion worldwide at the box office.
However, truth can be much stranger than fiction. According to some leading academics, pirates and privateers were not only very well organised but, in the case of the privateers, were the first enterprises to be backed by venture capitalists and they were as ruthless as the rogues from Somalia who are hijacking and holding ships to ransom today.
According to senior lecturer in politics at the University of Sunderland in the UK Dr Peter Hayes, there is a parallel between pirates and privateers and the modern day financial institutions that are out to make as much money as they can. The pirates were essentially a criminal crew that used the high seas in much the same way that highwaymen used the roads to plunder and loot. Pirating was a lucrative, if high-risk, business.
The privateers were privately owned vessels authorised by governments to attack foreign shipping in times of war. It was often referred to as state-supported piracy as it was not uncommon for ships to be attacked and robbed during peacetime, or for neutral vessels to be targeted. It was accepted as part of naval warfare from the 16th to the 19th century and the cost of commissioning privateers was borne by investors who shared in any of the plunder.
The privateer who decided to strike out on his own became a pirate and rather than being rewarded, risked being hanged if caught. The captain or owner of a privateer was required to post a bond agreeing to limit their activities to a specific area, or to attacking the ships of an agreed nation. While British ships cruised the Caribbean, the British colony of Bermuda was also heavily involved in privateering, almost as a colonial industry. It was also approved during the American Revolution when colonial forces turned on the British and privateered their ships.
However, the million dollar question is whether modern day venture capitalists and business in general can learn from the efficient rules and levels of organisation both pirates and privateers had to employ in order to survive. The old saying ‘he runs a tight ship’ takes on new meaning. In other words, if modern financial traders had been left to their own devices and rules rather than subjected to government regulation, would we have the current financial meltdown?
Dr Hayes, who recently published the paper Pirates, Privateers and the Contract Theories of Hobbes and Locke began studying this historical phenomenon because he was irritated by what he calls a bizarre academic orthodoxy that portrays pirates as freedom fighters who raged against the evils of capitalism, a sort of Robin Hood of the high seas.
‘I knew it didn’t make any sense because you don’t have to learn much about them to realise that pirates and privateers are pretty much interchangeable’, he says. And, privateering is primarily based upon venture capitalism. ‘Piracy was a very democratic form of organisation. And I thought that was interesting because that tied into the logic of venture capitalism and the logic of how venture capitalists organise things among themselves. I wanted to draw those two things together,’ Dr Hayes says.
Pirates have also sparked the academic interest of Peter Leeson, the professor for the study of capitalism at George Mason University in the US who will soon publish his book The Invisible Hook: The Hidden Economics of Pirates and who has published many papers on the operations of pirates.
The basic idea is that 18th century pirates, the Blackbeard types, are actually unlike their pirate predecessors who operated in the 17th century and did not rely on external financiers. The 17th century version jointly owned and operated the ship themselves. It was like a worker-owned and operated firm. They could select their leadership as they wanted, which is why they had a democratic form of governance, says Professor Leeson.
Dr Hayes also believes that pirates, because they were part of a crew of a few hundred, rather than a state of a few million, experienced a very direct and efficient form of democracy. ‘They have all of these checks and balances. All of the things we enjoy in democracy, pirates enjoyed in greater measure because their ship was like a little state’, Dr Hayes says.
The conventional wisdom is that without the rules made by government, there would be anarchy.
‘What pirates show is that this simply isn’t true,’ Professor Leeson says. Self-governance can produce more social cooperation and better economic outcomes for the firm and for society in general, than government-mandated rules.
This is where the story gets contentious and economists become divided. Professor Leeson argues that if the venture capitalists had been left to their own devices, the current financial crisis would not have been precipitated. ‘From my perspective, the financial crisis was generated in the first place in the US by government intervention in contrast to the free market,’ he says.
Professor Leeson points to the US Federal Reserve bank artificially depressing interest rates and then Congress, through the Community Reinvestment Act, encouraging the giant mortgage lenders Fanny Mae and Freddie Mac to offer loans and push housing towards individuals who didn’t have the financial strength to buy homes.
‘It’s the example of a noble motive: ‘Let’s put more people in homes’. But it had a perverse effect in that it actually led to this catastrophic situation. The blame isn’t on capitalism. It is on ham-fisted government intervention,’ Professor Leeson says.
So let’s get back on board the pirate ship to determine the parallels and lessons for today. Most people think that in the absence of government rules, society breaks down and people will become violent and resort to cheating each other. But each pirate crew was headed by a captain who was democratically elected. The crew could depose its captain for any reason, such as refusing to mercilessly slaughter resistors.
The level of power operating in the group was kept in check by all on board the ship. When out plundering, the captains had absolute power. At other times, it was the second officer or quartermaster who had the greatest authority. ‘You think of the notion of the president of the United States having executive authority … So when you are faced with an emergency and you have to make very rapid decisions the captain has absolute authority,’ Dr Hayes says.
Professor Leeson says the skull and cross-bones imagery on a pirate ship’s flag, universally known as the Jolly Roger, embodied the pirates’ ruthless dedication to fulfilling clear policies. That is, if we attack you and you resist, we will kill everybody on your ship. However, if you peacefully submit, then we won’t. It’s that simple! The cost of a bad decision for a pirate captain and crew was either death or capture. This gave them a very strong incentive to make very considered decisions! In the US, however, Chapter 11 allows companies and people to walk away from their debt, creating what economists call a ‘moral hazard problem,’ says Professor Leeson. This reduces the cost associated with making bad decisions, so ‘people just make more bad decisions’.
In some ways, pirate constitutions were similar to the US constitution in that they were brief and to the point. Because the constitutions were so short it wasn’t possible for a pirate crew to determine an outcome in all cases, Professor Leeson says. In cases where the rules didn’t cover a particular issue or event, they came together as the pirate council. And the pirate council acted as a sort of supreme court, he says.
Keeping things deliberately obscure can be a power technique, says Dr Hayes. And while the pirate constitution was simple, many of the crew were illiterate. This allowed ambiguity to creep into the equation, especially in the terms of the contracts between privateers and pirates. The further the pirate ship was from its sovereign base, the far greater the power of the crews to renegotiate terms became.
Pirates had to provide good working conditions to attract the workforce to a highly profitable, but also highly risky and socially unacceptable, enterprise. Professor Leeson says much of the attraction was based on self-interest and profit, but that also had to guide socially beneficial outcomes for the people within that society. It is a mistake to jump to the conclusion that very large companies should operate like pirate democracies, Professory Leeson notes.
The real lesson that we get from pirates is that we should allow the particular economic context to drive the specific economic organisation. In the unique context of a pirate ship, a workers’ cooperative was efficient, he says. But in companies such as Walmart, for example, because there are external financiers, it doesn’t make sense. It would lead to inefficiencies that would lead the company to crumble, he says
What business can learn from pirates
The free market works
Good self-governance by pirates produced more social cooperation and better economic outcomes for the firm and for society than government-mandated rules did.
Democracy rules
A pirate leader was democratically elected, fully answerable to the group and was fully aware he could be deposed for any reason on a majority vote.
Absolute power is kept in check
The captain held the power base when out on a plundering exercise that required quick decisions, but at other times the greatest authority was vested in other officers on board.
Strong branding wins battles
The pirate flag, the Jolly Roger, was an unequivocal and universal symbol. There was no mistaking the brand or its message whenever it was sighted.
When the cost of failure is high, better decisions will be made
A bad decision for a pirate ship meant capture, or death. This led to well-discussed and considered decisions before a venture was undertaken.
Have a simple constitution
Members of the crew clearly understood the simple constitution. For more obscure matters, a pirate council was called to resolve the matter democratically.
Provide good conditions for your workforce
When short-term rewards were high, but failure had dire personal consequences, the crew had to be carefully selected and well treated in order to participate fully in the venture.
Asset allocation
History shows that the clever pirate captain chose locations that would return the most lucrative booty. This ensured the crew was prepared to risk a fierce battle. The most prized assets were gold and silver, currency, jewellery and precious stones. However, they would also target ships carrying fabrics, food, anchors and rope, and rare items such as spices, sugar or the quinine needed to fight malaria. The spoils were divided equally among the crew, but the captain and senior officers would receive a bonus. Most pirates were regarded as ‘extreme squanderers’ with a tendency to spend whatever they got. Given the ever-present danger of their profession, there was a determination to live for the present rather than save for the future. The cost of a bad decision ? was capture, or death. This gave them a strong incentive to make very considered decisions