Peter Leeson does not talk like a pirate. But the George Mason University economist has figured out how to think like one. In his book The Invisible Hook, Leeson argues that, despite their reputation as anarchic ne'er-do-wells, 18th-century pirates roamed the seas in pursuit of rational economic goals. In fact, they had a lot in common with small business people of today. "They were profit-motivated," Leeson says, "and they confronted obstacles that a lot of modern small businesses also confront in their attempt to pursue profits." There's plenty that today's managers can learn from the scurvy dogs of yore. Here are the top seven tips:
Customize your management style. Pirate captains were elected by popular vote, and crew members enjoyed prescribed shares of captured booty. This democratic style of management worked well, Leeson says, because pirates did not rely on external investment: they got their ships by stealing them. Businesses that require outside funding, by contrast, are poorly suited to workplace democracy. "If you've got lots of external investors, then you need to give them a considerable amount of say over the operation," Leeson explains. "A merchant captain basically protected the interests of the investors." Unlike pirate captains, they ruled with an iron fist.
Reward diligence. One pitfall of profit-sharing systems like the pirates', says Leeson, "is that you create incentives for free-riding by the employees." To get around this problem, pirates were paid bonuses to encourage diligence in situations where they might be tempted to shirk. "If you were the first to spot a sail that turned out to be a prize," Leeson says, "you got the best pair of pistols on board the ship."
Incentivize risk-taking. To encourage boldness and initiative, employers need to shield workers from the consequences of their failures. A pirate who lost a leg or an eye in a fight would be paid a set fee from the crew's common booty to compensate for his loss. Explains Leeson, "They were incentivized to fight hard, because they didn't have to bear the cost of getting hurt privately."
Be true to your brand. "The Jolly Rogeer is one of the most lasting and memorable business logos ever - it might even rival the golden arches," says Leeson. The benefit for pirates: merchantmen who saw the skull-and-bones flag were more likely to surrender, since the brand implied a horrible fate for those who resisted. To keep the brand effective, pirates had to keeping reinforcing the implicit threat with inventively awful tortures like keel-hauling.
Adapt to regulatory changes. When governments started cracking down on piracy, the increased risk of punishment made it hard to attract new crew members. In response, pirates began pretending that they had forcibly impressed crew members who actually had joined voluntarily. They even placed ads to that effect in seaport newspapers. "That way, if a new recruit was captured, he could testify that he had in fact been forced to become a pirate, which would let him off the hook," says Leeson.
Manage risk. Pirates were not afraid to take risks. "They were very entrepreneurial people," Leeson says. All the same, they did what they could to mitigate their exposure. Under the matelotage system practiced by French buccaneers, two crew members formed a partnership which stipulated that if one died, the other would get his share of the booty. "The economic function was an insurance system," Leeson says, "a way to hedge the risk of piratical activity."
Have an exit strategy. Despite the manifest dangers of pirate life, says Leeson, "a few managed to retire as very wealthy people." One, Henry Morgan, was captured and put on trial, but thanks to his stores of booty not only escaped punishment but also garnered a lucrative post as lieutenant governor of Jamaica.