GOLD "FRONTING" I've been reading about the wacky economic theories of mercantilism, a term no one seems quite sure how to define. It seems to be nothing other than whatever the trade policies of European sea powers happened to be in the 17th and 18th centuries. One thing the mercantilists were quite concerned about was the "balance of trade," the gap between what a country exported and what it imported. They thought that a country would become richer to the extent that it exported more than it imported, keeping the difference in precious metals. The practice of hoarding gold and silver became known as "bullionism."

It may be a waste of time to criticize these already much-maligned theories of trade, but a few things leap to mind nonetheless. First is the observation that not all countries can follow this advice at once. One country's export is another's import, so the aggregate balance of trade can never be anything other than zero. I don't think this bothered the mercantilists, as it seems they saw trade as something of a war between nations--you got yours at the expense of others. But second and more importantly, what good is a "favorable" balance of trade? What good is amassing bullion? Though some surely take pleasure in the sight of gleaming vaults of gold bars, and gold and silver jewelry has always been in fashion, the main use of gold and silver is what you can buy with it. But bullionism effectively eliminates that use. Cameron says that bullion hoards served as warchests, insurance against sudden times of high expense. A war breaks out and you sell your gold, right? But even that use may have been undermined. Imagine that everyone has a hoard, a war breaks out, and now everyone wants to use their gold to buy arms and other supplies. What happens? There's a glut of gold, prices go down, there's a run on arms, prices go up. Suddenly a lot of gold can buy only a very little. Gold is fairly useless without goods that it can buy. In a way, it's the reverse of gold backing, where a currency's value is insured by the gold is stands for. Call it "gold fronting" or whatever, but gold will do nothing without something to buy. What's the solution? I suppose it is to invest wealth in capital improvements rather than to keep it in vaults. If they had used the gold to pay workers to build a factory, that might be better insurance if a war breaks out.

PIRATES, AHOY! All this reading about sea trade has made me interested in pirates again, so I went and got a bunch of books about pirates. I feel like a twelve year old boy. In general, I'm very interested in the ways that systems fail to work, either by encouraging unwanted behavior within the system (like corruption in the commenda) or by forcing people to go outside the system (like excessive taxation under Diocletian, below). Piracy is an example of the latter. J. L. Anderson's article "Piracy in the Eastern Seas, 1750-1850: Some Economic Implications" (in Pirates and Privateers ed. by David J. Starkey et. al., 1997) describes three basic forms of piracy and the reasons behind them. The first is "parasitic piracy." Parasitic piracy feeds on trade and as such, according to Anderson, will be a parabolic function of trade. As trade volume rises so do potential profits from piracy, and more pirate "firms" and drawn into the "industry." But the larger the volume of trade the greater the economies of scale of protection; it will cost less per ship to protect them against pirates. With a sufficiently high volume a full-time fleet can be employed to combat the pirates, and profits will diminish, causing exodus from the industry. Anderson writes that this was the major type of piracy in the years 1750-1850. The second kind of piracy, "episodic piracy," is roughly an inverse function of trade. This type of piracy can be thought of as a response to problems in the job market. When there is a downturn in the profitability or availability of legal employment, otherwise normal sailors may turn to piracy for survival until the next upswing. The third type is "intrinsic piracy." This refers to piracy that was an intrinsic part of the normal functioning of a state. The Vikings and Mongols could be described as practicing intrinsic piracy.

I'm interested in the relationship between the first two types of piracy, because they seem to run counter to one another. At low levels of trade, one tells us that trade increase should increase piracy, the other that it should decrease it. It seems, however, that parasitic piracy dominated episodic priacy, and the general effect was one of increase. I also wonder if both types of piracy might limit themselves by feedback loops. Parasitic piracy would diminish the profitability of the trade on which it depended, lowering the volume of trade and thus its own profitability. Episodic piracy would take pressure off the job market, leading to high wages among the legally employed and perhaps drawing people back.

The losses from piracy came in the form of dead-weight losses, as would tariff on shipping; piracy created a need for increased defence, effectively raising the price of shipping. Unlike a tariff or tax, piracy was unpredictable, and so created further losses through risk. Though it is easy to ennumerate the theoretical types of losses, it is difficult to estimate gross total losses, in no small part because companies may have had incentive to misrepresent them in government documents. In a petition imploring their governor to take meaures against piracy, a group of Chinese merchants in 1833 estimated their yearly posses at $15,000-$20,000. This number is to low to be believed, as some single boats at that time carried cargoes worth in upwards of $200,000. Why the low estimate? According to Anderson, it may be because the merchants knew that, in exchange for eliminating the pirates, the government would be justified in taxing them up to the value of their losses. It was best to say they needed help, but to downplay how much they needed it.

I also read some non-economics books on piracy just for fun, notably Sodomy and the Pirate Tradition by Barry R. Burg. It's actually a fascinating and quite academic book that makes the case that homosexual pairing was the norm in pirate culture, and flips around our current association of male homosexuality with effeminateness. Pirate society may have also been notable for its egalitarianism, if Marcus Rediker's "Hyrarchy and Libertalia: The Utopian Dimensions of Atlantic Piracy in the Early Eighteenth Century" is to be believed. He says that while fictional accountd of pirate utopias are likely false, the chain of command on pirate ships was more egalitarian than any other in the world. Captains ate and lived with crewmen, and generally only used their authority in times of battle. If a captain was unliked by his crew he was simply put ashore and replaced. Rediker writes that pirate ship also exhibited a great deal of racial harmony. Many were evenly split between black and white, and all races were afforded equal rights onboard. So pirates -- there's a lot you might not know.

PRINCIPAL/AGENT PROBLEMS IN THE COMMENDA? Cameron writes that, with the advent of large-scale sea trade, one of the first forms of economic partnership to evolve was the commenda. And older, more established merchant would provide the capital for a younger merchant to undertake a trading expedition, and the profits would be shared between them--an early method of investment. My question is, wasn't this institution extremely susecptible to principal/agent problems and corruption? In other words, wouldn't it be very easy for the younger partner to screw around and do a poor job (his money didn't stand to be lost) or to misrepresent the size of the profits (there would be no way for the partner to know). Given that the commenda appears to have thrived, I'm interested in find out ways in which these problems were dealt with, if at all. I'll see what I can dig up.