Monday
Apr222013

Efficient Organization among Pirates?  

In our last post, we discussed pirate democracy, based on Peter Leeson’s The Invisible Hook, a great and thought provoking read.

Our main argument was that democratic elections and checks on leaders that emerged in pirate ships illustrate a more general point: if we want to understand democracy, we should think not about the idea of democracy extending back to the Ancient Greeks, but about the incentives that democracy creates and the distribution of political power among different groups in society that underpins democracy.

We also questioned Peter Leeson’s interpretation, which explains the emergence of pirate democracy solely on the basis that this was the efficient arrangement for pirates — a specific instance of what we have dubbed elsewhere “the efficient institutions view”.

Peter Leeson has now followed up with a post, providing additional arguments supporting the idea that pirate democracy emerged because it was the efficient organization, and more generally defending the efficient institutions view.

Of course Leeson wrote the book on the subject, so we cannot disagree with the facts he presents.

Nevertheless, our interpretation differs.

First of all, we find the general presumptions upon which the efficient institutions view rests fairly unconvincing. What are exactly the forces that will ensure that institutions are efficient? And efficient for whom?

After all, Why Nations Fail is all about the ubiquity of extractive economic and political institutions that are blatantly inefficient. How can we understand, if not as highly inefficient for economic prosperity and for the majority of the population, regimes such as North Korea? We cannot appeal to their ephemeral nature easily either, since many of these are not exactly short lived. (Wonky note: here by “inefficiency”, we are not referring to Pareto inefficiency. Such regimes, under some circumstances, could lead to Pareto efficient equilibria given the existing set of economic and fiscal instruments. But they are “inefficient” from the viewpoint of maximizing the economic surplus in society or the size of the “economic pie” so to speak).

Second, there is a bit of an internal inconsistency to the efficient institutions view. Let us illustrate this with the example of pirates. Suppose that in fact democracy was adopted by pirates because it was the “efficient organization” for them. That would presumably mean that it furthered the ability of pirates to raid and ransack as many ships as possible. But is this really efficient from the viewpoint of society? Most people would presume that the damage that pirates cause is much greater than the benefits to themselves, especially because the prospect of piracy is likely to discourage commerce and investment. So in a world of complex economic, social and political relationships — i.e., the world we live in — even if efficiency at the level of some subunit can be ensured, this will typically be at the expense of inefficiency at some more aggregate level. But then how can we talk of efficient institutions prevailing in the society at large?

Third, Peter Leeson’s superior knowledge on this topic notwithstanding, we did not find his interpretation that compelling. Leeson notes that a democratic organization, with a more equal distribution of political power and better checks on leaders, was efficient for pirates. Probably right. But the same reasoning suggests that it would have also been efficient for many other businesses and social and political organizations. But we see nondemocratic organizations persist in many of those spheres. So where are the efficient institutions?

Our hypothesis— truly nothing more than a hypothesis, since we are not experts on the history of pirates — is that what distinguished pirates from much of the rest of society at the time was the distribution of de facto political power (in fact, the distribution of de facto political power was at the center of our theory of democracy in our previous book, Economic Origins of Dictatorship and Democracy, and we are still keen on this idea).

The lower strata of society until the 19th century did not have much de facto power pretty much anywhere else in the world around that time, so they could not make effective demands for a level playing field or for direct economic transfers or for political change meant to support these economic outcomes. As a result, there was no need for those currently holding de facto and de jure power to make concessions to them — particularly political concessions to further increase their political power and participation.

This was possibly different among pirates for the reasons that Leeson masterfully recounts: all pirates had cutlasses.

Now Leeson is right that there are other factors that may have made a democratic organization less costly among pirates than for other businesses. For example, a democratic organization on the factory floor, by shifting the ex post say on pay and profits to workers, may make it harder for the ex ante investments of the entrepreneur to be rewarded.

But in contrast to this reading of the purely efficiency-based view, workplaces have also become more democratic over the more recent past. Most notably, trade unions in many countries had a lot of say on many decisions of the factory throughout the latter half of the 19th century and much of the 20th century. But perhaps even more telling are economic cooperatives. These, following the Rochdale Principles named after the Rochdale Society of Equitable Pioneers founded in 1844, typically specify “democratic member control” as a defining characteristic. We would also hypothesize — once again without having studied the history of such cooperatives in detail— that the more democratic nature of today’s workplace and the much more democratic organization of cooperatives isn’t just because ex ante investments of entrepreneurs have become less important, but also at least in part because the de facto distribution of power on the factory floor has shifted towards trade unions and workers.

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