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Archive for January, 2011

Pirate Politics

I’ll admit it, I just began Leeson’s book about pirate economics; it arrived extremely late after I bought it online. Thankfully, the book very interesting. Although this may be a better suited for chapter one, I found it extremely interesting how Pirates were almost created by governments. What exactly do I mean by that? Well, originally (according to Leeson) privateers were hired to discriminately stealn from enemy countries vessels as an act of war, etc. As a lucrative, yet legal profession, it acted as a type of training ground for the would be indiscriminate pirates to be. After the wars were over, these privateers were out of work and look for a job. With the choice between the poor conditions, pay, and legality of shipping or risky, rewarding, and illegal pirating, the choice was easy for many. In my view, it seems as if governments accidentally created the problem of pirates for themselves.

So how does this tie into economics? I am not sure exactly, but I would venture to say that whether legal or not, government often paves the way for all types of economic activites because of their omnipresence in the market. 17th century pirates got the idea to steal on the high seas from the government just like ex-senators become lobbyists after getting the idea in gov. (?) This analogy is a bit far-fetched but hopefully someone understands it.

Branding the Risk

I found Skull and Bones very interesting.  In all my years of a “piramaniac” I had never thought much about the branding of the pirate.  I recognized the Jolly Roger as symbolic to piracy but never looked at it as a brand.  Recently, I have been involved with a few marketing projects, and in two of those projects I have been working on branding the events and team.  I am led to believe that excellent branding must contain different objectives.  The first of which is delivering a clear message.  Most of the pirate flags that were discussed in chapter four did deliver a clear message, ” to terrify Merchant-men,”  “Rather than risking resistance and subsequently slaughter, most prizes surrendered without a fight.”  As humans come across these brands they assume the risk of what they are going to get.  If I see a dollar store I assume that the products in that store are of a cheaper make, and thus how branding works.  In one of the posts I noticed that someone had posted about beef jerky. In short, it was stated that a company was the first to produce beef jerky and then Wal-mart caught on the the business and produced the same packaging but in Wal-marts package was cat jerky.  I believed this author failed to recognized the common sense instilled in us as humans.  The first company produces the jerky and has a certain distinction such as; packaging, quality, texture, price, and everything else that comes with producing a product. Then Wal-mart comes in and copies the packaging of the first.  If that is all they do I am sure you and I will recognize the difference in the product.  Surely, the price between these two products will be different. If I see a lower price I assume two risks; the cheaper one is probably a lower quality, and the second being that one of the products is an impostor.  So it was with the impostors out there on the open seas.  Sure they raised the Jolly Roger above their ship but I am sure that many of those merchant ships recognized which ships they could overtake and which ones they could not.  It could be assumed that the pirates that branded their flags with the purpose of making their purpose clear had the most success on the seas.

Dollars Change with Circumstance

“In the context of insurance we are comparing the same person in different circumstances. All that has changed is how much money he has.” Its very true. I do feel however that Mr. Friedman deliberately overlooks the complexities of real value to an individual to keep his examples simple and more understandable. What I mean by real value is that a house is not just a house, sometimes a car isn’t just a car, and a factory isn’t just a factory. A house means a lot to the person living in it. It is where he sleeps, eats, watches the super bowl and can protect his family from the elements of nature and human nature. A car is a mode of transport that gets us from our abode to work to pay the bills, get a loved one to the hospital in times of distress, or the cheapest way to go on vacation. A factory is a place where livings are made and particular goods are provided for those that may need them.

The great thing of real value is that it does provide incentive for the insured to practice less moral hazard. I’m going to take really good care of my house to insure that it’s there when I get home even though it is insured. I want to sleep in my bed, eat my food, and use my computer to do my homework. I don’t want to wait for the charred remains of my home to be replaced by a newer version of my house. Same with my car, I will take extra care to keep it maintained, because I hate waiting and paying for tow trucks and legal red tape when it comes to an accident, as well as not wanting it to break down when my spouse is in labor. I will want sprinklers to protect my factory so I can work to make a living. Some moral hazard can be dispelled by real world problems and real value.

This idea of hoisting the skull and cross bones before attack reminds me of the dominating U.S.S.R. men’s hockey team of the Cold War era, or any other dominating team. If you watch rugby, the perennial world champion AllBlacks from New Zealand perform the Maori Haka dance the Ka mate (kah mahtay’), whose chest slapping, tongue-wagging, face contorting call and response routine has an unnerving effect. The fear and insecurities that are brought about, just by the mention of their name, are enough to affect the play of the opponent. It would take a lot of determination to go against them and honestly fight with a state of mind and true intentions of possibly winning. Any doubt – weakness – in an opponent would make the victory easy. The dominating teams do not become that way on accident. Those teams have confidence that is not to be confused with cockiness. There is an expectation that their superior focus will empower them and they will win. The earlier the opponent rolls over, the better. It is the same instance for the pirates and their use of the “Jolly Rodger” flag. They are chancing that their opponent will raise their white flag before any injury to the crews or ships. With that flag comes a reputation, and with that reputation comes fear. The chances that the pirates would run into a similar situation as U.S.S.R. did against the Americans in the Winter Olympics in Lake Placid, New York, were slim. Just as in the movie Miracle, the coach, Herb Brooks says about the U.S.S.R. team: “If we play ’em 10 times, they might win nine. But NOT this game.” The pirates are chancing by raising their flag that their opponents are going to play one of the nine cards and not opt to play the one that will inflict the most damage to both sides. There is much less loss if they come out not with fight, but with fear and submission.

Signals, Signals, Signals

I have had a change of heart.  I used to think that I was too small and wimpy to “go on the Account” but after reading about the hidden economics behind the “Jolly Roger” I think I could do it.  Just hide behind the reputation and stereotype of other more manly and powerful pirates.  Apparently all that I have to do is just send the right signals. The Jolly Roger sounds like the perfect signal I would need to send.  Signals such as:  I am tough, I am fearsome, I am dangerous,  if you mess with me you will get hurt (all blatant lies).  That is what it takes to be a pirate and I can easily send that signal so long as I have the Jolly Roger on my side.

I guess its not that hard because I send signals all the time, and just like the signals sent by the skull and cross-bones, I am none of them.  Huzzah! I have a been a pirate all my life and have never known it.  Granted I am not trying to come off as a ruthless criminal, but there are things I am trying to convey about myself.  It goes all the way down to the type of music I listen too, and where and whom I listen to it with.  For example, if there is a cute girl nearby I like to listen to indie music so that I can build this persona of awesomeness.  “I’m awesome because I don’t try to be awesome” type of thing.

Other people send signals all the time and since Leeson helped me recognize this point I am all the more aware and amused by it all.  Why, for example do people eat certain things that we all know don’t taste good?  What type of signal are you trying to send?  What are you saying about yourself when you where a massive belt buckle and cowboy boots?  And finally, what type of signal are you trying to send when you are constantly commenting on what the professor and other classmates have to say?

Now that I am significantly aware and paranoid about my signals; am I every going to be able to ask a girl out again with out going crazy?

It’s a design feature

I made my first “cabled” knit scarf last year. Basically, it means that there are sections of the scarf where I crossed a few of the stitches before knitting them (if you’re still lost, you might be able to ask your grandmother, mother, or maybe even your sister, and if you don’t have any of those, try a friend). Now this scarf is great except for one little feature. Instead of crossing the stitches to the back to make it look like a braid, there is a point where I crossed them to the front. In the knitting world, that’s not a mistake. It’s a design feature. As a side note, it’s also a design feature only I can find, which makes it ten times better.

While I might be able to get away with calling a mistake in my knitting a “feature”, I have difficulty accepting the “feature” that comes out of Friedman’s example of the factory. I understand the idea behind the initial (and simplified) example. Instead of placing risk management with the manager of a factory, requiring $10,000 per year if he decides to install a sprinkler system, the owners simply pay a third party $30,000/year to insure and inspect the factory and install and maintain the sprinkler system. But if we complicate things a bit, let’s say I own ten factories. If I pay the third party to manage my risk of fire, I’m up to $300,000 for the year. However, if I were to hire someone for even $100,000 per year to inspect and ensure that the sprinkler system is up to code and spend $100,000 to install the system, I’m only spending $200,000 per year and I’ve managed the fire risk. I wish I could go with the simplified version and pay someone else to handle the risk, but if we assume that the factory in question is part of a group owned by the same individual, then the “feature” becomes a bug and a big waste of money.

Pirates and Drugdealers

Peter Leeson does an excellent job at explaining the real costs and benefits that Pirates had to deal with on a daily basis.  It was interesting to read about how pirates aren’t actually really “blood-thirsty.”  So much more went in to things about how they navigated and even how they would approach merchant ships.  Calculating the piratical costs of production takes many different things in to account.  If a pirate fails to minimize violence then they have so many possible issues that would arise such as: potential for damaging the prize, damaging the ship and damaging crew members.  I hadn’t previously considered the costs incurred with fighting merchant ships.  If a Pirate ship were to attack then all of a sudden they have to worry about maimed crew members, making insurance costs and hazard pay costs rise for the pirates.  If a pirate crew decides to battle another ship then they need to consider the potential damage that could have on their own ships, which would cause in turn problems with being able to catch to other ships and having to spend the necessary time that it takes to go somewhere to fix the ship.  The biggest problem that could occur when going after a ship that would be the most devastating for a pirate crew would be for them to sink a ship causing them to lose the “prize” and with that their whole reason for existence.

It was interesting as well to read about the varying costs of flying the “Jolly Roger” on their pirate ships.  If you weren’t a pirate and you wanted to pose as one of the pirates in order to scare pirates or for any reason then you had to incur the costs of the consequences if you were to get caught.  You would face the consequence of a pirate no matter what.
So something that is considered an excessive cost to one group or company can be considered a normal everyday cost to another group especially when the law makes it explicitly clear that it is illegal to do so.

Not sure if I am completely understanding the topic, but, if I were to grow and sell marijuana to the government, we’ll say in the state of Colorado, to people who have canibus cards and then my neighbor decides to sell it on the side then our potential costs are very different, because I have been licensed by the government to do it and he is doing it under his own name.

I may be completely off but enjoyed writing anyways.

Creating incentives on the open seas.

I enjoyed the chapter on Jolly Roger economics in the Invisible hook. Particularly the explanation of the signals that we send when we do certain things. I wondered for instance if the times I took dates to wendy’s had them guessing that I was frugal or if they concluded that I just didn’t care about them? I also had the interesting insight that the reason the Jolly Roger flag worked was not just because they attacked and killed sailors but also because pirates let people go. It’s an odd statement to make but the fact that pirates didn’t kill people all the time, in fact did it very rarely, allowed for them to to be profitable and for the signal to work.

If pirates never let people go free then no one would have an incentive to give up because the stories of the pirates letting them go would never make it to the ears of the future merchant sailors that pirates would run into. All they would hear about would be death and destruction and wouldn’t have any incentive to give up but rather to keep fighting reasoning that pirates killed no matter what so might as well fight to survive. But by attacking rarely and under certain situations pirates allowed for information to be available which allowed for informed decisions.

Sailors knew that pirates could attack and kill them, but they also knew that as long as you didn’t fight back you would be allowed to live. This information needed to get out so the pirates could maximized that value of the signal that they were sending.

A signals value comes from the understand people have of it. If I decided to wear a banana suit to class, to signify that I was a professional, people would be confused as to the signal that I was sending because it isn’t well known that banana suits represent professionalism. Now if it was common knowledge that a banana suit was something only very serious and studious students wore and that is was obtained at a high price then the signal that was sent would be meaningful. For a signal to be meaningful it must be recognizable by those whom you’re trying to show its value and it also must have a recognizable cost associated with it. A degree is a valuable signal to have because we can recognize the value that is associated with the time spent and the knowledge and skills gained in the process of getting that degree.

Basically a signal is as valuable as the information that is available about it.

Jolly Roger

When I was reading about the Jolly Roger is Leesons The Invisible Hook, I couldn’t help but think of my time spent in Uruguay. In Uruguay, drug dealers and dangerous gangs would alert those coming into the neighborhood though the means of graffiti. If you saw, for example, a blue, white, and red crest, you knew that neighborhood belonged to a gang backing National, and that you shouldn’t be wearing yellow and black. This seemed to be the same tactic used by the pirates. These hooligans used these signs as both a way to warn and a way to prevent violence, as the police were especially on the look out for gang violence. At the same time, this graffiti served a purpose to show power, and to keep control of the city. This caused these hooligans an economic advantage, because they knew that they controlled the drug traffic in that particular area and if they marked it properly, they could keep unwanted intruders out. This also pushed other smaller dealers out as well. This made me think of bigger corporations such as Walmart or Target, using their advertising advantage to push out the smaller competitors. The pirates used their flags as an economic advantage to push out other competitors and to maintain control of their territory.

Jolly Roger

I enjoyed the example of the signaling that the “Jolly Roger” represented.  “The Invisible Hook” gives a good insight into the thinking and rationality of pirates.  This chapter as much as anything leads me to think that the assumption of rationality really applies more that we think.  If pirates of all people can be describes as being profit maximizing while acting rational, then the majority of people ought to be at least remotely covered under this assumption.

Signaling is a rational way of eliminating the losses from free riders.  The Jolly Roger seemed like a very beneficial system that promoted general efficiency in piracy.  Signaling is also a major part of the reason why we are all attending this university.  We study, try and get good grades, and even join pointless groups or become slaves to professors just to be able to signal to graduate schools and future employers that we are qualified and well rounded.

Peter T. Lesson did a good job comparing the costs of signaling with the punishment of hanging for those that try and pretend that they were pirates.   There is also an implicit cost with those who cheat their way through school and that don’t really learn.  Once they are hired through the use of false signaling they will realize that they aren’t qualified for the positions in a lot of cases.  However, higher cost educational signaling (MIT, Harvard) is harder to fake and therefore is more credible than signals sent from lower cost educational institutions.  This higher quality signaling therefore leads to greater benefits.