Pirates Business Model– Black Beard Meets Adam Smith: Economic Lessons from Fringes of Capitalism… YARRR!!!

The pirates business model is attractive… it would be naive to think that the current low-level of activity suggests that they have found something else to do. ~Admiral Rix

Pirates are known for raucousness, recklessness, chaotic rapine… Pirates’ reality, however, is quite another picture. According to Peter Leeson; real-life 17th–18th Century pirates were highly organized criminals. Unlike swashbuckling psychopaths of fiction, historical pirates displayed sophisticated organization-coordination. They successfully cooperated with hundreds of other rogues, and even though there was potential for much conflict, they rarely fought, stole, or deceived one another.

Pirates formed loose confederations of maritime bandits, which effectively organized their banditry to prevent internal predation, minimize crew conflict, and maximize piratical profit. Pirates devised two mechanisms for this purpose: First, system of piratical checks and balances that crews used to constrain captain predation. Second, pirates used democratic constitutions to minimize conflict and create piratical law and order. Pirates adopted these mechanisms even before presiding civil governments in 17th–18th Century, and governance was self-enforcing by necessity.

However, in contrast, modern-day pirates share little in common with their predecessors, for example; 17th–18th Century pirates lived together for long periods at sea, whereas, modern-day pirates sail in very small groups and spend very little time together at sea. Modern-day pirates don’t exhibit any discernible organization structure, whereas, 17th–18th Century pirates clearly did. Unlike previous– pirates, privateers, merchant-men, or explorers, the ‘in-out’ character of modern-day pirates, coupled with the fact that crews are very small, means– they don’t require rules for creating order, rationing provisions, assigning tasks, and they don’t even require captains, in usual sense.

According to report ‘Economics of Piracy’ by Geopolicity; asserts that piracy is an emerging market in its own right, valued at between US$4.9–8.3 billion in 2010 alone, and establishes, for first time, an economic model for assessing costs-benefits for international piracy. Also, Geopolicity’s ‘Pirate Value Chain’ Model provides a comprehensive framework of trend analysis, which highlights– where the greatest rates of return on international counter pirate investment and policy are to be found… The report states that the number of pirates could double by 2016, increasing by 400 each year. This is being fueled by attractive financial incentives, for example; Somali pirates earning up to US$79,000/year; equating to almost 150 times their country’s national average wage…

In the article Pirate Economics by Michael Shermer writes: There is honor among thieves, as Adam Smith noted in his ‘The Theory of Moral Sentiments’: Society cannot subsist among those who are at all times ready to hurt and injure one another…. If there is any society among robbers and murderers, they must at least … abstain from robbing and murdering one another. Pirate societies, in fact, provide evidence for Smith’s theory that economies are the result of bottom-up spontaneous self-organized order that naturally arises from social interactions, as opposed to top-down bureaucratic design.

Just as historians have demonstrated that ‘Wild West’ of 19th Century America was a relatively ordered society in which– ranchers, farmers and miners concocted their own rules and institutions for conflict resolution way before the long arm of federal law reached them. According to Peter Leeson; pirate communities democratically elected their captains and constructed constitutions, and commonly outlined rules for drinking, smoking, fighting, gambling, and disorderly conduct, desertion

Enforcement was key: Just as civil courts required witnesses to swear on the Bible, pirate crews had to consent to the captain’s codes before sailing… Then, from where did the myth of piratical lawlessness and anarchy arise? From the pirates themselves, who helped to perpetrate the myth to minimize losses and maximize profits. Consider, for example; the ‘Jolly Roger–Skull and Crossbones’ flag signaled pirates’ identity to potential targets, the Jolly Roger prevented bloody battle that would needlessly injure or kill not only pirates, but also innocent merchant seamen.

This explains why pirates typically receive ransom payoffs instead of violent resistance from shipping crews and owners. It’s everyone’s economic interest to negotiate the transactions as quickly and peacefully as possible. Markets operating in a lawless society are more like black markets than free markets, and because the government has lost control of  society, Somali pirates are essentially free to take the law into their own hands…

In the article Economics of Somali Piracy by Donald Marron writes: Pirates tend to operate on credit– borrowing all necessary resources from community members or other pirates, who then ‘get a cut’ or ‘a sami’ (in Somali) once a ransom is delivered. According to lawyers who handle piracy cases, pirate translators tend to be educated men within the community who work for several different pirate gangs and are typically paid a flat fee, which can reach hundreds of thousands of dollars; they are essentially white-collar pirates. In many Somali piracy cases, a committee of investors or creditors fronts the cash for the piracy mission, and it’s up to the head gunman to deliver a tidy profit…

In the article Economic Analysis of Somali Pirate Business Model by Scott Carney writes: Like any business, Somali piracy can be explained in purely economic terms. It flourishes by exploiting the incentives that drive international maritime trade. The other parties involved; shippers, insurers, private security contractors, numerous national navies… stand to gain more (or at least lose less) by tolerating it than by putting up serious fight.

As for the pirates, their escalating demands are a method of price discovery, a way of gauging how much the market will bear. The risk-and-reward calculations for the various players arise at key points of tension: at the outset of a shipment, when vessel comes under attack, during ransom negotiations, and when a deal is struck. As long as national navies don’t roll-in with guns blazing, the region’s economics ensure that most everyone gets a cut…

In the article Pirating Essential to Capitalism by core12 writes: Although most people see pirates as solitary anarchists out to destroy capitalism, it turns out the opposite is true. They are the ones who forge the path. In the book ‘The Pirate Organization: Lessons from the Fringes of Capitalism’ by Rodolphe Durand and Jean-Philippe Vergne; suggest that pirates are far from the lone discontents in popular myths, but in fact, have always formed complex and sophisticated organizations that both challenge and change the course of capitalism.

Pirate behave in predictable ways: challenging widespread norm; controlling resources, communication, transportation, maintaining trade relationships with other communities; as well as, formulating strategies– favoring speed and surprise. According to Durand and Vergne; savvy modern-day entrepreneurs-organizations should keep a sharp eye on pirate space, as the game changes. Piracy is not random: It’s predictable and resides on the fringes of capitalism, and likely source of capitalism’s continuing evolution… pirates are an essential part of any dynamic capitalist system.

The authors are fascinated by pirates not so much for their actions of derring-do but the way they have driven capitalism’s adoption of new technologies. A crucial point they make is that the free market is never as free as those who create it may have us believe: Capitalism is not liberalism, the authors assert. The reason pirates have cropped up repeatedly in modern history is that people are often unhappy at the way powerful nation states and monopolistic corporations frame the rules for new markets, be they ownership of the– high seas, airwaves, Internet…

The authors define pirates as those that enter into conflict with states, especially when the state claims to be sole source of sovereignty. As such, these pirates threaten the state by upsetting the very ideas of sovereignty and by contesting the activities of the corporations and monopolies the state has legitimized…

In the article How Pirates of Old Really Did the Business by Marc Abrahams writes:  Pirates are a practical lot, at least in theory. According to Peter T Leeson, West Virginia University; pirates pioneered some basic economics. In his study ‘Pirational Choice: The Economics of Infamous Pirate Practices’ Leeson investigates the internal governance of violent criminal enterprise by examining the law, economics, and organization of pirates.

According to Leeson; Pirate governance created sufficient order and co-operation to make pirates one of the most sophisticated and successful criminal organizations in history. To effectively organize their banditry, pirates required mechanisms to prevent internal predation, minimize crew conflict, and maximize piratical profit. Pirates, he argues, invented a system of checks and balances to constrain captain predation, and devised democratic law and order among themselves. Remarkably, Leeson points out; pirates adopted both of these institutions before the U.S. or UK. These pirate practices, of the past, read like ‘best practice’ primer on economics and finance.

Successful buccaneers learned how to manage organizational growth; many pirate crews were too large to fit in one ship. In this case, they formed pirate squadrons … multiple pirate ships often joined for concerted plundering expeditions. The resulting pirate fleets could be massive. They recognized that big pirates had to be restrained from completely plundering the treasures of the little pirates under their command. Leeson uses simplified mathematical models to explain how this was achieved…

One sees, at a glance, how pirates come (in theory) to restrain or deflect themselves from destroying their own organizations, and that enables them to– focus on greater and more effective plunder of other communities-at-large.

Pirates pretend to be more sophisticated than they are; whereas, ship-owners pretend to be poorer than they are. According to Andrew Trask; both sides have an interest in speedy resolution, since a prolonged negotiation incurs costs. For the ship-owner, the cargo spoils and the ship goes unused. For the pirates, the captured crew must be fed and the ship guarded. And pirates cannot last long without a supply of ‘qat’, which is to them as rum is to Captain Jack Sparrow. Settle too quickly, though, and one side or other is likely to get a poor deal.

Pirates create periods of chaos, then society works out how to make this chaos work for everyone, at which point it becomes the new order. Piracy itself is not a long-term solution. The pirate’s job is to push the envelope, while corporation must play catch up as fast as it can. These communities need each other, and when corporations do catch up, pirates need to move on: This isn’t war without end, its negotiation. According to Kevin O’Leary; piracy negotiation is about crisis management. At certain times during the crisis, there is opportunity– it’s the ‘golden hour’.

According to Adams Cowley, who pioneered the development of modern emergency medicine, wrote: There is a ‘golden hour’ between life and death. If critically injured you have less than 60 minutes to survive. You may not die right then; it may be three days or two weeks later, but something has happened in your body that is irreparable. The golden hour principle is transferable from medical crisis to hostage crisis. A well planned and executed response provides foundation for successful negotiation:

  • Acting quickly to improve your chances of success.
  • Effective decision-making: collect – evaluate – decide.
  • Effective communication: explain – inform – reassure – engage.