If you are George Mason University economics professor Peter Leeson, you write a book on the economics of piracy. That book, The Invisible Hook, is a rollicking good read—more fun than any person should be allowed to have without a parrot, a hook, and an eye patch. Leeson’s goal, however, is more than merely collecting entertaining pirate anecdotes.

Instead, he argues that the “rational choice [framework of economics] is the only way to truly understand flamboyant, bizarre, and downright shocking pirate practices.” Accordingly, as indicated by the subtitle, this book is part of Leeson’s larger and impressive research agenda on privately created law and order. That pirates are a suitable part of such an agenda becomes apparent, Leeson explains, once one realizes that pirates were stateless (and often violent) people who nonetheless organized crews of 80 or more for plundering expeditions.

Leeson presents his argument in six main chapters sandwiched between introductory and concluding chapters cleverly framed as a management course taught by Professor Blackbeard. Chapter two explains that pirate ships’ leaders were democratically elected and were constrained by a system of checks and balances. Lest one think rogues and sea dogs were principled Madisonians, Leeson explains that the organization of ships arose out of pirates’ prior experience on merchant ships. Such ships had autocratic, often predatory, captains to protect the investment of the vessels’ absentee owners from crew shirking or theft. By contrast, stolen pirate ships had no concern about absentee owners and were therefore free to create an organizational structure that minimized captains’ abusiveness.

Chapter three explores pirate codes, the constitutional framework underlying pirate societies. These codes, which had to be agreed to by all pirates on a ship, aligned incentives among pirates and their leaders by having egalitarian pay structures; sought to minimize conflict on ships by proscribing activities such as gambling, bringing women aboard, or drinking below decks after 8 p.m.; and specified penalties for transgressions. Remarkably, pirates established puritanical rules to increase crew cohesion in the pursuit of profit, albeit ill-gotten.

Leeson next applies the economics of signaling to explain pirates’ use of the “Jolly Roger” flag. Although pirates were willing and capable fighters, conflict risked bodily harm, damage to their ships, or destruction of the pirates’ booty. Hence skull-and-bones flags, which distinguished pirate ships from less fearsome state-sponsored vessels flying national flags, and signaled to potential prey that resistance would be met with death. The flag thereby served as a cost-minimizing device by inducing merchant crews to surrender rather than fight.

Signaling and reputation-building also help explain the practice of torture. Beyond scaring merchant ships into surrendering, pirates also sought the cooperation of their officers and crew, rather than passive resistance such as hiding valuable lucre. They carefully cultivated reputations for barbarous treatment, which terrified crews into making pirates’ profit-seeking easier. Besides using torture to weaken the passive resistance of captives (and occasional acts of arbitrary sadism), pirates also tortured would-be captors sent by the government and abusive merchant captains.

In chapter six Leeson turns his attention to pirate crews, arguing that pirates relied much less on conscription than popular portrayal would have us believe. Conscription, after all, would threaten the cohesiveness that pirates sought. It was also unnecessary: The combination of captain cruelty on legitimate ships and high remuneration on pirate ships produced a steady stream of would-be swashbucklers. The reason for the misinterpretation, Leeson suggests, is that pirates deliberately sought to make their voluntary participation appear to be conscription in order to minimize the legal consequences (likely hanging) should they be captured. As part of this ruse pirates even staged shows intended to fool onlookers into thinking that captives who were willingly joining them were instead being impressed.

Leeson also describes another surprising feature of pirate ships: Though slavery remained common and discrimination the norm, pirate crews contained a substantial contingent of black sailors. Not that they were paragons of tolerance—some of the black sailors were slaves. Many, though, were free and equal members of pirate democracies. Leeson explains that slaves, like conscripts, endanger crew cohesion. The Public Choice logic of dispersed benefits and concentrated costs made racial tolerance preferable to slavery. While each pirate would have to divide any surplus generated by slaves with his crewmates, the costs—increased likelihood of capture and hanging if slaves hampered crew unity—were fully borne by each crew member.

Leeson’s book is magnificent. It also carries an important implication: If rogue pirates could organize themselves into relatively peaceful societies, then perhaps modern people should look less to coercive State solutions and more toward emergent order arising from voluntary human interactions.

Each of the ten essays is an estimable work, but some are likely to be of particular interest to Freeman readers. I’ll focus on four.

At the top of that list, I would place Peter Leeson’s essay, “Do Markets Need Government?” Most free-market advocates assume that “the rules of the game” must come from and be enforced by the government. Leeson, however, argues that market participants may do a better job than the State, writing, “The long-standing existence of vibrant markets under conditions of real or quasi-statelessness suggests that private ‘rules of the game’ must be possible without  government.” In commercial transactions, he points out, the participants have a lot at stake in the performance of contractual obligations.

That led them to develop commercial law completely independent of government, as well as tribunals to adjudicate disputes. Those tribunals did not have enforcement powers, but the need to maintain a good business reputation minimized flouting of their decisions. Violators were apt to face ruinous ostracism. Adam Smith’s “invisible hand” worked remarkably well.

Leeson goes on to show that the spontaneous order of the market also devised mechanisms to deal with criminal conduct. After reading his essay, it’s evident that the Hobbesian notion that society would be chaotic violence without a powerful state is untenable.

Another particularly valuable contribution is the late Norman Barry’s essay, “Economic Rights,” in which he laments that “for most of the time, in all countries, economic rights have been at the mercy of legislatures . . .with little or no protection from the courts or written constitutions.” He attributes this unfortunate state of affairs to the abandonment of the Enlightenment concept of the unity of liberty. In this concept, economic liberty is integral to an overall concept of liberty; most modern thinkers, by contrast, conclude that some aspects of liberty are important and others are not. They say they can tell wheat from chaff, with property rights and economic liberty being chaff. “There is scarcely any recognition of the connection between economic rights and other, more fashionable notions,” Barry writes.

He concludes that nations would reap huge productivity gains if they would steer away from “welfare rights” and regulatory intervention, and instead allowed people to produce and trade as they choose.

Julian Morris also merits special mention for his essay, “Private Versus Public Regulation of the Environment.” He takes issue with the presumption that the State alone is capable of solving environmental problems: “The reader may be surprised to learn that many environmental problems have in fact been caused by governments, sometimes in spite of attempts by private industry or businesses to stop them.”

I’ll mention one more essay, Cento Veljanovski’s “The Common Law and Wealth.” In it Veljanovski looks at this intriguing question: What kind of legal system is apt to contribute more toward a nation’s ability to produce wealth—common law or civil law? He notes that Gordon Tullock, among others, has observed that common law tends to be “untidy,” with duplicative costs, inefficient methods of ascertaining facts, and great latitude for wealth-destroying judicial activism. Other scholars, however, such as Richard Posner, maintain that since common law is premised on the legality of the status quo, it places a restraint on the use of law to redistribute wealth. This is an interesting debate with no resolution in sight.

Scholars who are interested in the field of law and economics will want to have this book on their shelves, and professors teaching a variety of law, economics, and political science courses will find in it a good many supplemental readings to get sharp students thinking about questions that mainline textbooks almost always overlook.

“A failure to act, and act now, will turn a crisis into a catastrophe,” President Obama said.

If someone expresses skepticism, Obama and other political leaders suggest that economists are unanimous in believing that government spending is the only answer.

“We have a consensus that we need a big stimulus package that will jolt the economy back into shape,” Obama said.

House Majority Leader Steny Hoyer agreed: “Every economist from right to left, Republican, Democrat, advises that it has to be a very substantial package.”

What Consensus?

It’s a lie. There was no consensus. (Anyway, a consensus doesn’t mean something is true.) Finding an economist who opposed government spending as a way to fix the economy was easy. More than 350 signed a petition opposing the bill.

“How is it the government is going to be able to spend a dollar in such a way that it generates a dollar or more in value?” asked George Mason University economist Peter Leeson. “A more likely possibility is that a dollar that government takes out of the private sector is a dollar the private sector doesn’t have to spend.”

Leeson is referring to the “broken-window” fallacy, which comes from Frédéric Bastiat’s story about a boy who throws a rock through a shop window. Since the shopkeeper has to buy a new window, some believe the mischief will actually stimulate the local economy. The fallacy lies in overlooking that the shopkeeper would have spent the money some other way if he didn’t have to replace the window.

Every penny the government spends will first have to be borrowed from someone in the economy—that is, someone already struggling with the recession’s effects on their income, assets, and future planning. So where’s the stimulus?

It’s also quite a conceit to believe that a few men in power are smart enough to know precisely how to spend trillions of your dollars.

“They’re exploiting a minor correction in the economy. . . . Markets go through corrections all the time,” Lydia Ortega of San Jose State University told me.

I pointed out that people say this correction is worse—maybe like the Depression.

“But markets need to go through this correction,” she said. “What’s happening now, what’s making it worse, is that people don’t know what’s going to happen. There’s so much uncertainty generated by the government spending.”

The more the government does, the more private investors wait.

“Part of the reason that people aren’t spending is they don’t know what these characters in Washington are going to do,” says Howard Baetjer of Towson University.

“Japan tried six spending packages in the early 1990s. The result? A decade of lost growth,” points out Ben Powell of Suffolk University. “It’s the government’s own policies that contributed to the bubble. The government’s not the answer to it.”

One Finger in the Dike, Two Crossed

I wanted to ask the bailout’s big boosters about that. Two agreed to talk: Maxine Waters of the House Finance Committee and Majority Leader Hoyer.

Hoyer conceded that he “overstated the case” when he said every economist endorsed government action.

Wasn’t the bubble caused by too much debt?

“No doubt about it.”

So the answer is more debt?

“Most economists believe that’s the case.”

This stimulus spending, is it going to work?

“I hope so.”

Might it cause hyperinflation?

“We hope it doesn’t.”

Well, that’s comforting.

“Government can’t sit and just twiddle its fingers,” Rep. Waters told me. “We have got to interject money into these banks and these systems that help this economy work.”

How are you going to pay for it?

“We have borrowed money before. We continue to borrow money, but we pay it back.”

She left a few things out. Debt means interest payments and higher taxes in the future. It also means inflation when the Fed prints money to reduce the real value of the debt.

But the politicians are confident that they can wisely spend trillions of your dollars. The arrogance of the political class is stunning.