Posted by Jack @ 8:36 pm on May 19th 2009

Piracy and “The Market”

Peter Leeson, author of the 18th century pirate history The Invisible Hook, and currently guest blogging at The Volokh Conspiracy, alleges many risible things in this post, but the very first deserving criticism is the idea that “The market has spoken” regarding the wisdom of putting guards on the commercial shipping in that area:

The Market Has Spoken Despite the surge in Somali piracy and encouragement from some employees of the U.S. government, commercial ships aren’t choosing to put armed guards on their vessels. And with good reason: given present conditions, anyway, it’s a bad idea.

The profit-driven behavior of commercial shippers corroborates this possibility. Like pirates, commercial shippers also have strong incentives to keep merchant sailors alive and well: insurance costs. If armed guards reduced the dangers of piracy instead of increasing them, commercial shippers’ insurance costs would fall by employing guards instead of rising. But in this case commercial shippers would have hired armed guards already, which they haven’t. Commercial shippers don’t need government to encourage them to undertake the most profitable course of action.

The market has spoken: Even in today’s pirate-infested waters off Somalia, the low probability of being captured by pirates, together with the fact that pirates release their hostages unscathed, means it’s cheaper–and safer–to go without armed guards.

Putting aside the very questionable utility of referring to a sliver of one particular industry as “the market”, I would contend that if it is a market at all, it is hardly a free market. The security costs of the shipping concerns transiting the Horn of Africa are heavily subsidized by numerous governments in the form of continuous and highly expensive naval patrols, over flights, and tactical response units. This is not to say that international naval involvement is a bad thing; shipping route security is a perfectly valid naval mission, but let us not get carried away with appeals to free market effectiveness under present conditions.

And Leeson goes significantly further, taking this supposed market decision as the final word in whether private guards should be used. He bases this opinion on the nature of Somali pirate economics and patterns: they rarely kill or hurt any of the hostages, because it does not pay to do so. This is all good to a point: we should recognize the internal economic model that drives the pirate actions, acknowledge the limited loss of life, reign in excessive demonization of what are, essentially, thieves, and view with skepticism overly ambitious military proposals from armchair generals and admirals. Maintaining sea lanes free from piracy ought to be a naval mission, but one might enquire as to how long, and to what extent I, the taxpayer, should subsidize the international shipping industry, even accepting some significant form of public good argument. Is there no responsibility placed upon the industry? Is the entire burden to be born, forever, by the taxpayers of the various countries providing protective units? And is the limited loss of life the only marker of importance? What of the loss of cargo, shipping days, and ransom payments? Surely one so respecting of “the market” recognizes that these costs are passed on to the consumer, doubling our economic burden? What of the slippery slope? What of signaling? What of principal? Nothing, for the market, as Leeson envisions it, has spoken.

Leeson seems to take it as given that armed resistance by the shipping industry will result in significantly increased crew death and injury, while providing a limited deterrent result. This is a highly dubious assumption. Imagine hot combat between a large vessel and the types of open topped outboard boats used by the Somali pirates. The pirates must keep the target ship sufficiently undamaged such that it may be boarded and sailed back to their home port. This limits their choice of arms to small caliber weapons, and a very judicious use of RPGs. Given the required success criteria of the attackers, their only useful target would be the actual armed resisting guards and to a lesser extent, the crewmembers in the pilot house. Now consider how difficult it is to aim a small caliber weapon while driving on a bouncing motor boat in open seas, at what will likely be high speed due to the evasive maneuvers of your target. Under thse conditions, tt is quite hard to hit anything smaller than a barn. Contrast this with the armed guards’ situation: a nearly rock steady platform, elevated firing position, sandbagged and armored firing point, and mounted machine guns. These guards are under no restriction as to what they can hit. Their target is anything on the boat: people, engine, controls, tanks.

Having practiced this type of defense, I believe the large vessel has a supreme advantage. Let me make it absolutely clear that many of these advantages evaporate when facing attacks from small boat attacks that are not weapons or mission limited. Given more high powered weaponry and no damage constraint, especially a suicide bomb attack, small boats are extremely dangerous foes. But that is not what we are talking about here.

Armed guards are not a panacea, they are but one tool, one option, and they are certainly not mutually exclusive with continued naval patrols. But the utility, cost benefit-wise, of the significant military presence is really limited. We are talking about hundreds of thousands of square miles of ocean, and it must not merely be patrolled, but all boats have to be “deconflicted,” which frequently requires actual eyes on contact to determine if it is a pirate mother boat or just a fishing vessel. It is a bit of a fools mission. We can, at best, reduce the frequency of some attacks. Given our obvious limitations in the naval arena, the unlikelihood of any near-term diplomatic solution, the unsuitability of a land invasion, and the cost of the whole venture, should we not at least consider incentivising commercial shipping to take on some active role?


  1. Armed guards also face the issue of the weapons themselves. There are numerous and differing legal hassles encountered when civilians attempt to enter a foreign country with weaponry. Legal maneuvering must take place at each port that the ship stops at. This might not be a problem for a ship that simply sails between two countries, but it poses a great challenge for the private security forces themselves. The alternative involves keeping the weapons at sea which requires a second boat in addition to the primary cargo vessel. These factors mean that armed security is actually pretty expensive, particularly when deployed to a sizable fleet of ships.

    Comment by Cameron — 5/19/2009 @ 10:03 pm

  2. And the liability costs. A lot of international hoops will have to be gone through for shipping agencies to be able to have legal cover to open fire on vessels, period, to say nothing of having any sort of insurance from domestic or international prosecution in the case that they fire mistakenly on a civilian craft or PETA or something. I’m not really sure how that works, actually—you (Jack) would know better than I. But surely it’s not just as easy as giving guns to crews.

    And, of course, that creates an actuarial nightmare for insurance companies.

    Comment by Brad — 5/19/2009 @ 10:20 pm

  3. I don’t think Peter is saying that the current situation is the overall economically efficient one. I think he is saying that, all else being equal, if the option is between having armed guards or not having armed guards, it is more efficient to not have them, and we’d know this, since this is what the shippers (who have the most incentive to get this right) have chosen to do.

    Peter Leeson is a solid Austrian, and I believe his overall position on the matter, is that to get the best results, we should take the shipping lanes out of the ‘commons’. (It is possible I’m getting this confused with one of his fellow bloggers at ‘The Austrian Economics’ blog where he usually writes… which is, incidentally, one of only three blogs I read daily).

    Comment by Redland Jack — 5/20/2009 @ 2:48 am

  4. Cameron, I agree, of course there are legal hassles regarding weapons. There are also legal hassles regarding having a multi-million dollar ship and cargo attacked, captured, driven at some hazard into a poorely maintained port, the crew held at gunpoint until ransom negotiations and a tricky cash turnover are accomplished. There are legal hassles associated with forming a multi-national naval force with variable ROE and under no unified command, in constant patrol. There might have to be negotiations and diplomacy involved. We are conditioned by the past eight years to see those things as unnecessary, but it is a new era. heh.

    Certainly there are liability costs, which is, I think, exaclty Peter’s point as to why the shippers, under present conditions, have chosen not to use them. We, the international community, using our militaries, have our hand on the market scale. Of course their preference is for someone else to do the security. BUT, you ALWAYs have the right to defend yourself in international waters from pirates. It is a rather fundamental rule of international admiralty law. Certainly, any pirate with a lawyer can file suit, but the presumptoiin lies with the defense, in this case. As for the mistaken identity oops problem: like that never happens with the actual militaries out there. India, im lookin at you.

    Redland, I agree that is part of what Peter is saying, but he seems to me to go well beyond this. He is saying it is a bad idea in general, and using the market conditions as they stand now as proof. I question some of his assumptions and conclusions.

    Comment by Jack — 5/20/2009 @ 6:23 pm

  5. As I am nothing if not a triumphalist, I would like to point out the first two reasons for a decrease in piracy, as assessed by Admiral Potts in this interview:
    “- The deployment of armed private security guards on board ships who have been 100% successful in deterring or defeating attacks;
    – Better management practice by shipping companies, such as hardening their vessels or taking evasive action”
    The market has spoken indeed.

    Comment by Jack — 2/12/2013 @ 12:06 pm

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