“Adam Smith, Meet Captain Hook: The Upside of Pirate Greed” by Peter Leeson

Lately it seems that barely a week passes without headlines of Somali pirates’ latest depredations and yet another, bigger, and more daring pirate attack. In November one crew captured a Saudi supertanker, the Sirius Star, along with the 25 crewmembers and $100 million in crude it was carrying—a prize big enough to make Blackbeard blush. Last week the pirates ransomed their prize for $3 million, releasing the ship and crew.

Between January and October 2008, 63 pirate attacks were reported in the Gulf of Aden and off the coast of Somalia. Somali pirates hijacked 26 ships; fired on 21; and took nearly 540 sailors hostage. By contemporary standards, at least, these “pirate statistics” are remarkable.

But an equally impressive “pirate statistic” has gone virtually unnoticed: the number of seamen who survived their harrowing captivities by Somali sea dogs and lived to tell the tale. For example, all of the Sirius Star’s sailors were “in good health” when their pirate captors released them. And they’re not alone. According to data from the International Maritime Bureau, in stark contrast to the impressive number of assaults, only one sailor has lost his life at Somali pirate hands. This represents less than two-tenths of one percent of crewmembers taken hostage by Somali pirates between January and October and an even smaller percentage of the total number of sailors these pirates have attempted to capture.

Even a single death is a tragedy. But the number of confirmed, Somali pirate killings is surprisingly small—especially for a band of Kalashnikov-toting criminals. This hardly comports with our image of pirates as fiendish, blood-lusting curs. What gives? Are Somali pirates pacifists?

Hardly. But they are profit seekers. And just like their 18th-century predecessors, Somali sea dogs have discovered that it’s good business to treat their hostages decently—or at least to avoid killing them. Of course, not all pirates have been cordial with their captives. But according to several hostages, such as the Kenyan sailors one Somali pirate crew attacked in early 2007, their captors kept them well fed and even let them to send text messages to loved ones.

In 1776 Scottish moral philosopher Adam Smith published The Wealth of Nations. In it, he described the famed “invisible hand.” According to Smith, individuals pursuing their self-interests are led, “as if by an invisible hand,” to promote others’ interests as well.

Your grocer, for example, wants to serve his own interest—he wants to make money. But to do so he must serve your interest as well. He must provide you with the highest quality groceries at the lowest possible price or you’ll patronize a competitor that does instead. The grocer doesn’t care about you, of course; he doesn’t even know you. He cares about himself, but in serving himself he serves you too.

Among Somali pirates we can observe a bastardized version of Smith’s “invisible hand,” or rather, an “invisible hook.” Pirate greed also has some laudable consequences. Pirates’ victims are of course worse off as a result of being accosted by sea bandits. And unlike legitimate businessmen’s self-interest seeking, which creates wealth, pirates’ self-interest seeking does no such thing. But conditional on victims’ capture, pirate greed saves innocents’ lives.

Pirates, like grocers, are profit-motivated. And, like grocers, to make money pirates must serve someone else’s interests too. Somali pirates’ most valuable assets are the ship, cargo, and crewmembers they take. These assets are only valuable to their owners, however, if they remain intact. Dead prisoners won’t fetch much in ransom. To maximize ransoms, then, pirates must minimize brutality toward captives.

Further, to extract loot from their victims with as little ado as possible, pirates must avoid abusing them indiscriminately. If pirate victims know they’ll be abused, or even killed, whether they comply with their attackers or not, they have no incentive to do what their attackers want. On the other hand, if pirates reserve punishment for captives who don’t comply with their commands, resisting them becomes costly, providing a strong incentive for captives to comply, serving pirates’ ends.

These logical implications of Somali pirates’ profit-making motive explain the rarity of their recourse to murder or abuse. And they explain why 18th-century pirates often treated their compliant captives civilly as well. It was simply good business.

An important part of 18th-century sea dogs’ “pirate code,” for instance, was to show mercy to compliant prisoners. As an 18th-century pirate explained to one of his crew’s prisoners, they “observe strictly that Maxim established amongst them not to permit any ill usage to their Prisoners after Quarter given.”

Some Somali pirates have also taken to enshrining this profit-preserving policy in writing. For example, French authorities found a “pirate manual” amidst the crew they captured earlier this year, which the pirates used to regulate prisoner treatment. Like their forefathers, Somali pirates also recognize that it’s in their self-interest to respect their captives’ lives. They can make more money by restraining violence toward victims than unleashing it on them.

The piratical analog to Smith’s invisible hand—the “invisible hook”—is alive and well among Somali sea bandits. Blackbeard, Calico Jack Rackam, and the rest would be proud.

Peter T. Leeson is BB&T Professor for the Study of Capitalism at the Mercatus Center at George Mason University and author of the new book, The Invisible Hook: The Hidden Economics of Pirates. He also blogs at The Austrian Economists.


  1. Nice Site layout for your blog. I am looking forward to reading more from you.

    Tom Humes

  2. I have a number of comments and questions.

    Firstly, the lives of the prisoners are orders of magnitude more valuable to the pirates, than that of the ship or the cargo.

    In most cases, they have very little ability to sell the cargo and even less so the ship. Who’s going to buy an stolen freight ship from a bunch of criminals? What capacity do the pirates have to profit from a container of sheep skins?

    Thus the actual value of the cargo and ship are the costs to the shipping company in higher insurance premiums and penalties, should the cargo or ship not be returned.

    Wouldn’t you therefore eliminate the ship and cargo from the analysis of pirate behavior?

    It is also interesting to consider that in negotiations, the shipping company wouldn’t likely consider the financial cost of armed conflict – as that cost would be born by the company’s state or another Naval force in the region. Whereas the cost of armed conflict would be primary in the pirate’s minds during negotiation.

    The second thing I find interesting, is the alignment of interests between competing groups of pirates. It must occur that in some cases, butchering the crew members and taking the smaller amount of loot from the ship would generate better returns and lower risk than negotiating for many months in a standoff. Not to mention that many of the pirates are likely to have no concern for human life and be mentally unstable.

    But this of course would make armed conflict more likely in the future – perhaps guaranteed. So their joint interests of no conflict seems to be winning over their short term interests of easy quick loot.

    How do shipping companies negotiate with pirates? Presumably, the pirates are trying to extract as much money as they can, whilst minimizing the risk of armed conflict with Naval forces. So how do they settle on, for instance, $3 million as the price paid to avoid armed conflict? Why not $10 million?

  3. Hi Willie,

    Thanks for your interesting comments. Let me see if I can address some of your questions.

    While you’re right that in many cases pirates couldn’t sell the ship or cargo to a third party, the ship and cargo still have value to pirates in terms of what they can “sell” them for back to their original owner. In other words, since the ship and cargo have value to their legitimate owner, they have value to pirates. The ship and cargo therefore remain an important part of pirate decision making.

    On the fighting issue, I think that costs are still very much present and influencing merchant ships’ decision to take on assaulting pirates. Even if part of a merchant ship’s cost of violent conflict with pirates is borne by its country’s navy, there remains an important part of this cost that is borne fully by the merchant ship: the damage done to its ship, cargo, and crew.

    The problem you’re describing with “joint interests” is what economists call a “collective action problem.” You’re suggesting that while from the perspective a particular pirate crew, the profit-maximizing move may be to kill everyone and abscond with whatever is on board, other pirate crews’ interests are best served if this crew pursues the peaceful strategy instead. While there are probably some collective action problems for Somali pirates, this one seems unlikely to me. What a pirate crew can get through the slaughter-and-abscond strategy is probably very little, in part because of the difficulty of reselling vessels and cargo that you pointed to. The big money lies in ransom. But ransom requires the capturing pirate crew to not harm or kill the captives. Ransoming is certainly more costly than slaughter-and-abscond; but since the discounted revenue of ransom is probably much greater than the payoff of slaughter-and-abscond, it remains in any given pirate crew’s interest to ransom.

    Your question about how pirates negotiate is a good one. Unfortunately, little is known about these negotiations since both merchant ship owners and pirates seek to keep the negotiation process (and in many cases, their outcomes) private. Having said that, we can speculate about what these negotiations are like. As you hint at, the core of the issue is this: pirates are trying to get as much as they can without getting caught; ship owners are trying to pay as little they can and still recover their ship, cargo, and sailors in good shape. Pirates presumably have a minimum amount they’re willing to accept to release the ship, cargo, and crew in good order. Ship owners have a maximum amount they’re willing to pay to achieve this outcome. The ransom price must fall somewhere between these values. Which end of the spectrum it falls closer to depends on how skilled pirates are in bargaining compared to ship owners. So, why $3 million instead of $10 million? There are two possibilities. These pirates were poor bargainers and misjudged the value of what they stole to its owners. They could’ve gotten more, perhaps as much as $10m, but only managed to get $3m. Alternatively, the owners weren’t willing to pay $10m because they only valued what the pirates stole at $3m and the pirates extracted the maximum sum that was possible.

    One final remark: I don’t think it’s quite right to think of ransom as the price of avoiding armed conflict, as you put it. Pirates don’t threaten to wage battle against the ship owner if he doesn’t pay (they threaten to destroy his property). And the ship owner isn’t demanding ransom from pirates to not wage battle against him (he’s not demanding any ransom at all!). Rather, ransom is the price ship owners’ pay pirates to recover their stolen property.

  4. Response…
    Peter Leeson is almost right and spoils the accuracy of his interpretation of the grocer’s pursuit of his self-interest in serving her customer’s self-interest, which in turn serves hers.

    Yes, we serve our self-interest best in exchange by serving the interests of others.

    But, I am not sure of his accuracy of interpretation in his previous paragraph:

    “According to Smith, individuals pursuing their self-interests are led, “as if by an invisible hand,” to promote others’ interests as well.”

    That is not what Adam Smith wrote. He did not write anything about “as if by an invisible hand”. The quotation marks around this statement suggests that Adam Smith wrote those words; he most certainly did not.

    There is ‘as if’ attached to ‘led by an invisible hand’. Peter Leeson has added them and incorrectly wrapped them in quotation marks.

    Also the way the sentence is written implies that Adam Smith was making a general statement applying to all individuals; he wasn’t.

    He wrote about a specific set of individuals (some but not all wholesale merchants) whose risk aversion to foreign trade led them to prefer to deploy their capitals in their domestic locality, despite the higher monopoly- driven profits from trading with the British colonies in North America under the protection of the Navigation Acts, enforced by the Royal Navy.

    The individual decisions meant domestic annual product was higher than it may otherwise would be, and because the whole is the sum of its parts, the domestic economy, and resulting employment and output, were greater than they would otherwise be.

    Having explained all this clearly and adequately, earlier in the chapter, Smith summarises his explanation, with the well-known 18th century literary metaphor of ‘led by an invisible hand’ (WN IV.ii.9: 456), which applied in this specific case and ‘in this, as in many other cases’, but not all cases, as the over 70 examples he mentions along the way of self-interests not being beneficial to society in Books I, II and III of Wealth of Nations.

    In fact Smith analyses how prices are determined, how markets work, and how the ‘great orders’ go about their business without once mentioning ‘an invisible hand’ at all.

    Professor Peter Leeson should have written his sentence as:

    “According to Smith, SOME individuals pursuing their self-interests are led IN MANY BUT NOT ALL CASES, “by an invisible hand,” to promote others’ interests as well.”

    By generalising Smith’s thinking in the manner he did, Professor Leeson repeats the mantra of some ultra-conservative-minded propagandists for State Corporate Capitalism (which they are perfectly entitled to assert in their own names), but their assertions are their own and have nothing to do with Adam Smith.

  5. Jessica Pellien says:

    Apologies, but I misplaced a comment. If you resubmit, I will happily post it as soon as possible.

  6. Interesting way to look at it. I never realized pirates as just profit makers. what about walking the plank and all that stuff?

  7. Gavin Ferenzo says:

    It’s the weirdest thing how pirates (real pirates, not software pirates that RIAA loves to sue) are starting to make the news. This is probably the 3rd or 4th pirate news I’ve read in the past 6 months or so.

  8. John Mulva says:

    A very interesting review, topic and book. As a teacher of economics, the effects of the invisible hand and other concepts on the lives of pirates past and future provide a unique opportunity to study the “dismal science.” I have encouraged my students to post their opinions here, we will see.

  9. If the merchant bargins with the pirates for the ransom ammount, wouldn’t the merchant have to have some idea who the pirate is? And if so, what is stopping the merchant from going after the pirate after receiving his cargo and crew?

  10. i think that when the navy seals killed the pirates and captured the American captain, they changed this pirate code a little. i think that now they are going to have to factor in the risk of being killed, and maybe not be so kind to their hostages. even though they may not get as much for ransom because they might have to hurt some hostages so people wont come after them, it will save their lives. this could be looked at as the opportunity cost.

  11. Pete Leeson says:

    Thanks to Mr. Mulva and others for their questions. Some thoughts about them below . . .

    Brian, we don’t have any record of 17th- or 18th-century pirates making captives walk the plank. (There is an instance of this in the 19th century, however). But some other pop-pirate depictions are more accurate. These include the peg leg (wooden legs were used as prosthetics), the colorful bird resting on the pirate’s shoulder (exotic birds could be kept as pets or sold), and even the ‘pirate code’ (pirates used written ‘articles’ to help govern their ships).

    Dagny, if the ransom is delivered at sea, then attacking the pirates after dropping off the ransom would often put the merchant crewmembers’ lives at risk. This would lead to large insurance premium increases for ships that adopt this strategy, which owners want to avoid. If the ransom is delivered on land, identifying and tracking down the pirates will be very difficult. In both cases the merchant owner’s cost of attempting to capture the pirates after paying the ransom will typically exceed the benefit.

    Rachael, you raise a good question. How will the US navy’s killing of pirates alter pirates’ incentive to behave toward hostages in the future? Although pirates have vowed revenge for these deaths, I think it’s unlikely they’ll follow through on it. If future merchant crews believe they will be tortured or killed when they fall into pirate hands no matter what, they will have a very strong incentive to fight their pirate attackers–to the death if need be. But this is exactly the opposite kind of behavior pirates want to encourage. Pirates want merchant crews to surrender to them peacefully and easily. To achieve this, however, merchant crews must expect that they will be ‘treated well’ if they surrender, which in turn means pirates must abstain from harming prisoners.

    If exacting revenge would in fact successfully deter authorities from coming after pirates, pirates would face an important cost of treating prisoners well, as you suggest. But since it’s unlikely that by harming prisoners the pirates will cause the US government to back off–and may in fact cause the government’s war against them to intensify–this cost is small and possibly even negative.

  12. Very interesting. I still can’t believe this is happening in these times.I was wondering how do they treat their women hostages.I wouldn’t trust how they treat any hostages.

  13. Ben Henderson says:

    Hello Peter,

    Of course we understand the motives of pirates today, but I’m wondering about the pirates of the past. Were there in fact pirates that may be been more socially accepted than the monsters we seen today?