0:36 Intro. [Recording date: May 18, 2009.] Economics of pirate life: pirate life pretty orderly. Think of a bunch of guys running up the rigging, knives and cutlasses in their teeth, chaos. Part of the popular image--rogues, highly disorderly criminals, fascinating and lovable to us. But also image of culture of pirates' code. Turns out that pirate ships were cooperative and orderly, not perfectly so, but more so than depicted. Critical for pirates: ability to stay together. Had to create some kind of honor among thieves in order to function, pursue piratical profit. Early system of constitutions. Couple of main pirate officers: captain and the quarter-master, both elected by the crew. Could be popularly deposed if they overstepped. Democracy. Also had actual written constitutional system establishing democracy as form for selecting leadership along with some rules and other parts of a pirate code. Different from ship to ship but some similarities. Rules that regulated theft and violence; also rules that regulated things like drinking, smoking, and gambling. Why? Those sorts of behaviors were likely to generate significant externalities on ships. Smoking on land may generate some externalities--smell, health effects--but on a ship you were likely to blow the ship to smithereens, wood and cloth, lots of gunpowder. Negative externalities included that it was a lot of guys crammed together in a very small space for a long period of time. Drunkenness, gambling could engender violence.

5:34 Image of criminality from Hollywood: Treasure of the Sierra Madre, breakdown of honor among thieves. How did pirates keep opportunism by the captain or crew members from destroying their enterprise? The way you keep people honest is by contracts and laws, but pirates had a lot of guns, etc. Key thing to not defraud or plunder is to make the contracts self-enforcing. If you were a pirate and you were caught, it wasn't simply that you couldn't pursue profit that way anymore, but that you were likely to wind up at the end of the hangman's noose. Two sorts of contractual arrangements, one explicit and one implicit. Idea of an agreement between an ordinary crewmember and the pirate leadership. Needed some leadership; not practical to have whole crew voting on whether or not they should fire broadside or cannon 3. Needed someone to enforce rules. Leaders endowed with this kind of authority can use it or take advantage of it at the crewmembers' expense. Many pirates came from merchant ships that had very autocratic governance arrangements, with captain having near dictatorial control. Pirates keenly interested in preventing abuse. Mixed bag: regular pay with possibility of abuse, versus lottery of much potential pay with pirate captain whose incentive for abuse would be much larger because the prizes were bigger. With a merchant captain who engaged in abuse, in principle there were courts of law. With a pirate captain, nothing you could do with an illegal behavior. Solution more effective: democracy, but also the idea of the constitution. Before an expedition, each member of a pirate crew signed off on the set of rules that they collectively created before "going on the account." Written contract. Important function: making the terms explicit. Write down in the contract that captain may not take larger share than he is entitled to and here's what we do if the booty's value is unclear, then nothing the captain can say to defend against such abuse.

11:27 Ordinarily in illegal enterprises, written documents are frowned on because they can be used in court to demonstrate the illegality. Pre-Madison Madisonian framework for pirates. How did this arise and how did they avoid the legal complication of proof that they were pirates? Derived from pirates' predecessors, the buccaneers, who operated from about 1630-1690. In between pure pirates--Blackbeard and Calico Jack Rackham, early 18th century--and privateers, state-commissioned and sanctioned sea robbers. Buccaneers did some of that during wars, but when wars ended turned to outright piracy. Had a chase party [sp?]: primarily French sea-roving outlaws. Constitutional system; not as democratic but had a system of workman's compensation, how pay would be allotted, democracy as method to make important decisions. Privateering is even older; Shifts Articles, establishing rules aboard the ship. Privateering needed less elaborate rules. Additional cost of writing rules down conditional on being captured was small. By the 1720s when you had a high probability of being caught, you were pretty much going to be hanged no matter what. Bart Roberts allegedly pitched the Articles overboard; 18th century newspapers later reprinted them. Captains on dock looking over able-bodied fellows; did fellows read Articles and want in? Obviously not. What was the sequence? Speculation: In tavern, many living together on land-base in Bahamas, modern-day Nassau. Various rogues, someone would decide to get together and go on the account. Tavern or brothel; not a lot of Best-Buys around at the time. Probably sat around together and discussed what rules and regulations to adopt. Didn't have to reinvent the wheel; had other examples and experience. Elected the captain; could be the person who had the idea to put the group together. Could these folks read and write? A good percentage were semi-literate. Few pirate memoirs, but a good percentage could at least sign their name. Hard to argue that the Articles were very important. Role of the quarter-master: to act in the interest of the crew. Religious about relaying the Articles to the crew-member. Oral tradition; and some could at least basically read. Motley bunch; different languages also a problem; most Articles we have are in English; good percentage of the pirates at the time were English. Commonly the signatory promised to remain part of the crew till a certain sum had been made.

21:02 How were the pirates able to enforce effort? Tasks are open-ended; war situation, where usually effort is enforced with the stick of threat of court martial or death, carrot of medals or honors. Primarily incentivized crew members by giving bonuses. First to spot a potential prize; if you were seen to observe exceptional valor during battle. Get extra booty as laid out in constitution, or set of pistols. Who made those decisions? Who played the best soccer? The quarter-master, most likely. Even where exercised, shaped by popular will on the ship. Rent-seeking, trying to get in with the good graces of the quarter-master. Same flaws as democracy. Worker's Comp system: during battle, likely to get injured. System would break down if everyone wimped out. Hence system of worker's compensation: if your left leg is lopped or blown off, you get a certain number of pieces of eight; right leg same amount or higher; eye, arm, etc. Different values presumably reflected the values placed on them in the act of pirating. Some discretion--half a leg? Some judgment call. Quarter-master was a separation-of-powers equivalent, balance, ballast, against the captain. Captain wielded authority during battle; quarter-master wielded the lion's share of the power at all other times. Both democratically elected. Day-to-day decisions fell completely under the quarter-master's discretion. For bigger issue or pirate Articles unclear or not clear if there was a rules violation, pirates formed a kind of judiciary. Captain and quarter-master competed for highest office; if captain deposed, often it was the quarter-master who was elected in his place. Played to the interests of the ordinary crew member.

27:24 Tyranny. One theme of book: parallels between democratic constitutional government in our lives and in these pirate situations. Guard against tyranny was deposing: marooning the captain, governor of your own island. How was that mechanism enforced? Contrast with tyranny of the merchant ship captain, sadism, opportunism, captain who wanted larger share of food, etc. Real physical abuse, cat-o'-nine-tails, death of crew members from over-discipline. What protected the crew besides the piece of paper? Crew-member sentiment. Captain but one guy, no formal backing. On a merchant ship, revolt against captain was mutiny, punishable even by death. On a pirate ship, crew outnumbered the captain. Access to weapons on merchant ship but they were locked away; on a pirate ship, everyone had a weapon. Non-monopoly on force on a pirate ship. Arms less freely available on a merchant ship. Illegality of the pirates took away the opportunity to use the mutiny as a check on tyranny. Tough on merchant ship to make case that the captain was a sadist. Decent percentage of mutinies on merchant ships ended up going pirate, second largest way that pirates recruited new sailors. Illegality leads to more order. The very criminality of pirates was responsible for a desirable part of their system. Merchant ships can't go this route because what is profitable and efficient depends upon your economic circumstance. Landed merchants provided the capital for merchant ships; principal/agent problem. Couldn't have the ownership group saying to the sailors, "Yeah, sure, when you get out there pick whomever you want--it'll all be fine." Some shared interests, but interests of the principal are not always aligned, governance problem. Legitimate sailors paid on a wage basis. Pirates don't have external financiers; get ships by stealing them. Sea-going stock company, co-op/employee-owned venture. Can't look at merchant ships and say they should have had this democratic structure because it wouldn't have worked for them; similarly, can't look at pirate ships' workman's comp model and say this is how legitimate modern businesses should be organized. Costs and benefits to different organizational structures. Wal-mart partly organized on that basis: encourage ownership in the entire enterprise to discourage free-riding. Stock options. Correct solution to the principal/agent problem will differ in different circumstances.

36:22 Mike Munger podcast example: Steven Cheung article, hauling a barge up the Yang Tze river, worried about neighbor shirking so pick an aggressive disciplinarian. Pirate captains suggested as being enlightened in book, but maybe every once in a while want a sadist. Blackbeard story: invited crew member into his cabin; underneath table Blackbeard shoots the guy in the kneecap: did it just to remind people what he was capable of. Blackbeard successful: a great leader can extract rents, get away with more. Bill Belichick, football. Willing to sacrifice something in pay to be associated with the winning team. Don't want to go so far as to subject yourself to someone who is maniacal. Want a quarter-master who won't let you sit on your laurels, but who will enforce the rules. Cheung case sensible because their pay is a share, not a fixed amount. If you receive a fixed wage you don't have that interest. Also in barge case, simple goal. In pirate case, need wise effort. Shirking is a different order. In pirate case, shirking might be ducking down rather than going over the edge, subtler; don't want to be pushed forward constantly by the whip.

41:33 Jolly Roger--the skull and crossbones. Signaling device. Basic idea is that the flag was used as a way to communicate that you are pirate and not another sort of belligerent who may be attacking you, who might possibly be legitimate. In the 18th century, British ship might be attacked by a Spanish or French coast guard ship. Like privateers, government commissioned vessels commissioned to protect against interlopers--basically smugglers. Abused and plundered occasionally. Not pirates. Coast guard ships were restricted in how they could react to a merchant ship that resisted. Not allowed to wantonly brutalized crew members after crew members cried out for quarter, surrendering. Different from being attacked by a pirate ship, where if you resist, pirates can and did do anything they wanted. Pirates wanted to communicate that greater scare factor. Ships carried flags of other nations as trickery. Smart thing to do before flying the Jolly Roger was to try to figure out what nation the ship you wanted to attack was from; could be flag it was flying or some other nation. Friendly ships stopped by each other to communicate. Pirate ships were refitted merchant ships to be faster, more agile, more guns, and also more crew members. Why put up the Jolly Roger at the last minute? Cost of piracy was whether or not a merchant ship resisted. Want to avoid brawl which could damage the pirate ship, crew members could die; could ruin the cargo or ship you are trying to take over. Want peaceable surrender. Merchant ship might even resist a coast guard ship; want to avoid even that. Why put flag up? Why not just tell them? And why didn't coast guard ships run up the Jolly Roger? Speaking trumpets so could tell them, but flag is a way to communicate from a further distance. Coast guards don't do it because the cost of flying the Jolly Roger higher for a coast guard ship: pirates are symbol of outlaw. Coast guard ship is officially legitimate; if it flies the Jolly Roger, it could be hunted down. But they could just say they were kidding. Consider a merchant ship that surrenders peaceably: merchant investors don't want their cargo stolen, but they also don't want their capital--the ship--damaged. Unless they have an unusually precious cargo. Were captains given standards of when to attack or not? Around 1719-1721, British government passed law saying if you are a merchant ship and you are armed and you do not attempt to defend against a pirate attack, then you are subject to prison time and wage forfeiture. Suggests that the merchant ships are overwhelmingly surrendering. Two parts to the Jolly Roger flag: Flag communicates that you are an outlaw and if you resist you will be brutally punished. Other side: if you surrender peacefully, then I won't do that to you. Tough promise to keep is the one where you follow through on brutalizing you. Brutalizing prisoners is costly unless you are a sadist. No evidence to suggest that a higher percentage of the pirate population was sadistic than regular society. Not inherently more democratic, either. Rationally self-interested economic actors. Average pirate just wants money.

51:50 What did they do? Did they take the boat? Look around. Quarter-master's job to make the decision. If there's specie, take it. Sheep, hard to feed, unlikely to take it. Humans, have to feed, but did take humans. Fenced the plunder or divided it up. What did they do with the crew? If they needed members, they would ask who wanted to join them. Conscripted, but overall didn't need to: better treatment and potential for better pay. Pirates could be selective. Other crew members, if they'd submitted peacefully, were put back on the ship if the pirates weren't going to take that ship. Occasionally the pirates would drop them off someplace, possibly uninhabited. Not too inhabited--don't want to get chased. Dead men tell no tales; but pirates wanted people to tell tales about how scary they were and how if you surrendered they were nice. Victims who were spared just helps the next pirate crew. Problem of common information. Pirates overcame this through captain- and crew-specific reputations. Everybody knew about Blackbeard. No historical record that Blackbeard ever killed a single merchant sailor. Didn't need to because of his reputation. Ghurkas if they came across two people sleeping, would slit the throat of only one; opposite side of reputation. Wanted both sides to spread.

56:37 Who cares about pirates in the 1700s? Party conversation, young lady didn't care at all. Do you have a pulse? Johnny Depp helped create market for this book. Romance about pirates, bizarre, like having a romance for communism. Thieves. Actually justified. Should be unabashedly pro-pirate. All thieves should be condemned as thieves, but not all thieves are equal. Pirates actually gave something back to the world: testament to the effectiveness of self-governance and early experimentation with constitutional democracy. Remarkable for the time, experimenting with a system of checks and balances before Madison and before the English bill of rights. Outlaws, motley, violent; system effective amongst them points to the robustness of social organization. Another thing: "Invisible Hook" is play on invisible hand of Adam Smith. Conditional social benefits. Pirates' self-interested behavior could be counted as genuine social benefits: racial tolerance. At a time of black slaves, slaves were granted their freedom. Not out of lack of racism, but it improved their bottom line. Testament to some of the modern world's most cherished values: democracy, equality, social insurance. Governance without government. Governance can emerge without legal coercive mechanisms. Clarify: governance refers to a system of privately created rules and means of enforcement. Spontaneous order can be a means of creating governance. If I agree not to steal your shoes and we have a third party like a quarter-master and I also agree that if I steal your shoes I will be subject to 15 lashings from the quarter-master, then if I steal your shoes, that is not coercive. That is not coercive. Sounds like law but is not. Not arguing we don't need rules or we don't need enforcement. How do these things emerge, and are they voluntarily agreed to ex ante or not? Coercive power of government is described as a social contract, but that is not a contract, not like signing a piece of paper, not born into it. Pirates of Penzance exception.