Arnold Kling  

Exit and Voice

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James Surowiecki contrasts the governance of pirate ships with that of corporations.


Leeson’s analysis of pirate governance focusses mainly on the way in which this system deterred self-dealing. But the pirate system was also based on an important insight: leaders who are great in a battle or some other crisis are not necessarily great managers, and concentrating power in one pair of hands often leads to bad decision-making. Interestingly, although many law firms and Wall Street partnerships have taken this insight to heart—managing partners and top executives are often elected, and power in these organizations is generally more diffuse—most corporations since the mid-nineteenth century have behaved more like the Royal Navy, with C.E.O.s who have close to unlimited power and employees who have no say in who runs the organization or how it’s administered.

My guess is that a pirate's opportunities to exit are limited. Therefore, a pirate needs voice in order to be able to check the leader. In contrast, when you work in a corporation, if you can't stand the CEO, you can leave.

I am not sure why law firms or investment banks would be more democratic. Perhaps when you are high up in a law firm or an investment bank, the cost of leaving can be high. In that case, you would need more voice.

The pointer to Surowiecki's piece comes from Tyler Cowen. The exit/voice distinction is due, of course, to Albert O. Hirschman.


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CATEGORIES: Business Economics



COMMENTS (4 to date)
H man writes:

Just the opposite. There are a couple of opportunities for exit on a pirate ship. The ships had to come into a safe harbor from time to time. A pirate could jump ship then. Furthermore as noted in the article most pirates volunteered. Since the larger the crew was, generally speaking, the more successful in piracy it was. Unlike a modern corporation which is trying to limit the number of employees it has, a pirate crew was usually looking to expand. This made it easy to leave a ship and find another berth. It is not as easy to join another corporation once you left a first one. Also you have a bunch of heavily armed thieves who could kill the captain and throw the body overboard. In the Royal Navy, Kling's golden scepter in the guise of the law would punish both acts. That's not the case on a pirate ship.
It is the ease of entry and exit including the captain's desire to live that allows for a more benign governance.

As to why the pirate's were able to figure out the division of labor better than the Navies at the time I'm not sure.

Bruce G Charlton writes:

My guess would be almost the oposite of AK - because this pirates codes looks like a formalization of the egalitarian arrangements of hunter gatherers.

Precisely because exit is so *easy*, and because any single disaffected individual can cause considerable harm, cooperation must be bought by egalitarian arrangements.

It is also a consequence of a relatively unspecialized society - and it also serves to keep the society unspecialized.

Karl Smith writes:

In most firms the voting member are the partners. They are the owners of the firm. The shareholders vote for the CEO and they are the owners of the corporation. That seems pretty consistent.

The question in my mind is what makes employee ownership important in some organizations and not others. My guess has to do with the specificity of the capital.

The capital that law firms use is not at that specific to law - office space, desks, computers, etc. So that capital can be leased by group of workers.

On the other hand an automobile factory is highly specific to making automobiles. That capital must be purchased and it is risky.

This requires investors who are residual claimants and as residual claimants they will typically demand control over the firm.

Mr. Econotarian writes:

The captains of the (wind powered) Royal Navy had to rule with an iron fist of discipline, which often involved horrendous lashings for even small offences.

The reason: the captain and few officers were highly outnumbered by the enlisted men. The enlisted men could trivially take over the ship at any time if they lost faith in the captain. The captains kept this faith though a combination of demonstrated skill at captaining as well as severe discipline of the men.

Ships have no immediate course of action to land-based government's monopoly of violence to handle crimes such as mutiny. Thus the monopoly was with the captain.

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